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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-Q (Mark One)þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended March 31, 2005
 or o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from to
 Commission File Number: 000-25955 Waste Services, Inc.  (Exact name of registrant as specified in its charter)
 Delaware(State or other jurisdiction of
incorporation or organization)
    
    01-0780204(I.R.S. Employer
Identification No.)
 1122 International Blvd., Suite 601, Burlington, Ontario, Canada L7L 6Z8(Address of principal executive offices and zip code) (905) 319-1237(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).
Yes þ No o The number of shares of Common Stock, $0.01 par value, of the registrant outstanding at April
29, 2005 was 99,568,951 (assuming exchange of all exchangeable shares
not held by Waste Services, Inc.).




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TABLE OF CONTENTS PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    2Condensed Consolidated Balance Sheets as of March 31, 2005 (unaudited) and
December 31, 2004
    
    
    2Unaudited Condensed Consolidated Statements of Operations for the three months
ended March 31, 2005 and 2004
    
    
    3Unaudited Condensed Consolidated Statement of Shareholders Equity for the three months
ended March 31, 2005
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2005 and 2004
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    24Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    34Item 4. Controls and Procedures
    
    
    35PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    35Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    35Item 3. Defaults upon Senior Securities
    
    
    35Item 4. Submission of Matters to a Vote of Security Holders
    
    
    35Item 5. Other Information
    
    
    35Item 6. Exhibits
    
    
    35Signatures
    
    
    36Code of Business Conduct & EthicsSECTION 302 CERTIFICATION OF CEOSECTION 302 CERTIFICATION OF CFOSECTION 1350 CERTIFICATION OF CEO & CFO
  1




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PART I. FINANCIAL INFORMATION 
 Item 1.Financial Statements WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.) 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except share amounts)
 March 31,
    
    
    December 31,2005
    
    
    2004(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    12,044
    
    
    $
    8,507Accounts receivable (net of allowance for doubtful accounts
of $1,049 and $1,264 as of March 31, 2005 and December 31, 2004, respectively)
    
    
    46,145
    
    
    
    47,856Prepaid expenses and other current assets
    
    
    9,695
    
    
    
    10,940Total current assets
    
    
    67,884
    
    
    
    67,303Property and equipment, net
    
    
    121,161
    
    
    
    130,467Landfill sites, net
    
    
    170,039
    
    
    
    169,616Goodwill and other intangible assets, net
    
    
    333,705
    
    
    
    327,756Other assets
    
    
    24,040
    
    
    
    25,441Total assets
    
    $
    716,829
    
    
    $
    720,583LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    21,579
    
    
    $
    25,949Accrued expenses and other current liabilities
    
    
    45,351
    
    
    
    42,533Short-term financing and current portion of long-term debt
    
    
    1,169
    
    
    
    1,166Total current liabilities
    
    
    68,099
    
    
    
    69,648Long-term debt
    
    
    275,921
    
    
    
    276,214Accrued closure, post-closure and other obligations
    
    
    12,667
    
    
    
    10,974Cumulative mandatorily redeemable Preferred Stock (net of
discount of $7,023 and $8,426 as of March 31, 2005 and
December 31, 2004,
respectively)
    
    
    69,586
    
    
    
    64,971Total liabilities
    
    
    426,273
    
    
    
    421,807Commitments and contingenciesShareholders equity:Common stock $0.01 par value; 500,000,000 shares authorized;
93,056,849 and 90,358,196 shares issued and outstanding as of
March 31, 2005 and December 31, 2004, respectively
    
    
    931
    
    
    
    904Additional paid-in capital
    
    
    352,014
    
    
    
    345,904Treasury stock at cost; 500,000 shares as of
March 31, 2005 and December 31, 2004
    
    
    (1,235
    )
    
    
    (1,235
    )Options, warrants and deferred stock-based compensation
    
    
    29,418
    
    
    
    28,282Accumulated other comprehensive income
    
    
    27,907
    
    
    
    29,133Accumulated deficit
    
    
    (118,479
    )
    
    
    (104,212
    )Total shareholders equity
    
    
    290,556
    
    
    
    298,776Total liabilities and shareholders equity
    
    $
    716,829
    
    
    $
    720,583
 The accompanying notes are an integral part of these condensed consolidated financial statements. 2




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WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.) 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share data)
 Three Months Ended March 31,2005
    
    
    2004Revenue
    
    $
    88,985
    
    
    $
    50,317Operating and other expenses:Cost of
operations (exclusive of depreciation, depletion and amortization)
    
    
    64,490
    
    
    
    34,287Selling, general and administrative expense
    
    
    15,467
    
    
    
    10,559Depreciation, depletion and amortization
    
    
    9,549
    
    
    
    5,472Foreign exchange gain and other
    
    
    (238
    )
    
    
    (206
    )Income (loss) from operations
    
    
    (283
    )
    
    
    205Interest expense
    
    
    6,825
    
    
    
    6,316Cumulative mandatorily redeemable preferred stock dividends and
amortization of issue costs
    
    
    4,842
    
    
    
    4,019Loss before income taxes
    
    
    (11,950
    )
    
    
    (10,130
    )Income tax provision
    
    
    2,317
    
    
    
    829Loss before cumulative effect of change in accounting principle
    
    
    (14,267
    )
    
    
    (10,959
    )Cumulative effect of change in accounting principle, net of provision
for income taxes of nil and $132 for the three months ended
March 31, 2005 and 2004, respectively
    
    
    
    
    
    
    225Net loss attributable to Common Shareholders
    
    $
    (14,267
    )
    
    $
    (10,734
    )Basic and diluted loss per share:Basic and diluted loss per share attributable to common shareholders
before cumulative effect of change in accounting principle
    
    $
    (0.15
    )
    
    $
    (0.15
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    Loss per
share - basic and diluted
    
    $
    (0.15
    )
    
    $
    (0.15
    )Weighted
average common stock outstanding - basic and diluted
    
    
    96,516
    
    
    
    70,583
 The accompanying notes are an integral part of these condensed consolidated financial statements. 3




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WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.) 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
 For the Three Months
Ended March 31, 2005

(In thousands)
 AccumulatedOtherTreasury
    
    
    
    
    
    
    Comprehensive
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Additional
    
    
    Shares
    
    
    Options and
    
    
    Income
    
    
    Accumulated
    
    
    Shareholders'Shares
    
    
    Amount
    
    
    Paid in Capital
    
    
    at Cost
    
    
    Warrants
    
    
    (Loss)
    
    
    Deficit
    
    
    EquityBalance, December 31, 2004
    
    
    90,358
    
    
    $
    904
    
    
    $
    345,904
    
    
    $
    (1,235
    )
    
    $
    28,282
    
    
    $
    29,133
    
    
    $
    (104,212
    )
    
    $
    298,776Common shares and warrants issued
    
    
    2,641
    
    
    
    26
    
    
    
    6,111
    
    
    
    
    
    
    
    630
    
    
    
    
    
    
    
    
    
    
    
    6,767Deferred stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    506
    
    
    
    
    
    
    
    
    
    
    
    506Conversion of exchangeable shares
    
    
    58
    
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,226
    )
    
    
    
    
    
    
    (1,226
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,267
    )
    
    
    (14,267
    )Balance, March 31, 2005
    
    
    93,057
    
    
    $
    931
    
    
    $
    352,014
    
    
    $
    (1,235
    )
    
    $
    29,418
    
    
    $
    27,907
    
    
    $
    (118,479
    )
    
    $
    290,556
 The accompanying notes are an integral part of these condensed consolidated financial statements. 4




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WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.) 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 Three Months Ended March 31,2005
    
    
    2004Cash flows from operating activities:Net loss
    
    $
    (14,267
    )
    
    $
    (10,734
    )Adjustments to reconcile net loss to net cash flows
from operating activities:Depreciation, depletion, and amortization
    
    
    9,549
    
    
    
    5,472Cumulative mandatorily redeemable preferred stock dividends and amortization
of issue costs
    
    
    4,842
    
    
    
    4,019Amortization of debt issue costs
    
    
    345
    
    
    
    2,210Deferred income tax provision
    
    
    2,161
    
    
    
    829Non-cash stock-based compensation (benefit)
    
    
    506
    
    
    
    (1,391
    )Other non-cash items
    
    
    143
    
    
    
    (279
    )Changes in operating assets and liabilities (excluding the effects
of acquisitions):Accounts receivable
    
    
    1,528
    
    
    
    1,918Prepaid expenses and other current assets
    
    
    1,197
    
    
    
    (5,779
    )Accounts payable
    
    
    (4,477
    )
    
    
    2,449Accrued expenses and other current liabilities
    
    
    2,751
    
    
    
    1,1224,278
    
    
    
    (164
    )Cash flows from investing activities:Cash used in business combinations and significant asset
acquisitions, net of cash acquired
    
    
    (639
    )
    
    
    (28,858
    )Capital expenditures
    
    
    (6,804
    )
    
    
    (9,207
    )Proceeds from asset sales or business divestitures
    
    
    453
    
    
    
    Deposits for business acquisitions and other
    
    
    (398
    )
    
    
    (2,445
    )(7,388
    )
    
    
    (40,510
    )Cash flows from financing activities:Proceeds from issuance of debt
    
    
    
    
    
    
    12,000Principal repayments of debt
    
    
    (402
    )
    
    
    (419
    )Sale of common shares and warrants
    
    
    7,125
    
    
    
    Proceeds from release of restricted cash and release of collateral
supporting letters of credit
    
    
    
    
    
    
    14,410Proceeds from the exercise of options and warrants
    
    
    
    
    
    
    241Fees paid for financing transactions
    
    
    
    
    
    
    (665
    )6,723
    
    
    
    25,567Effect of exchange rate changes on cash and cash equivalents
    
    
    (76
    )
    
    
    (138
    )Increase (decrease) in cash and cash equivalents
    
    
    3,537
    
    
    
    (15,245
    )Cash and cash equivalents, beginning of period
    
    
    8,507
    
    
    
    21,062Cash and cash equivalents, end of period
    
    $
    12,044
    
    
    $
    5,817
 The accompanying notes are an integral part of these condensed consolidated financial statements. 5




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WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.) 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. Organization of Business and Basis of Presentation The accompanying unaudited condensed consolidated financial statements include the accounts of
Waste Services, Inc. (Waste Services), successor to Capital Environmental Resource Inc. now known
as Waste Services (CA) Inc. (Capital, Waste Services (CA) or the Canadian operations) and its
wholly owned subsidiaries (collectively, we, us or our). We are a multi-regional, integrated
solid waste services company, providing collection, transfer, landfill disposal and recycling
services for commercial, industrial and residential customers in the United States and Canada. In
2003, we initiated a disposal-based growth strategy to enter the United States solid waste market
and establish leading, vertically integrated market positions. Under this strategy, we enter
geographic markets with attractive growth or competitive characteristics by acquiring and
developing landfill disposal capacity, then acquiring and developing waste collection and transfer
operations. As part of our business strategy to expand into the United States, we entered into a
migration transaction, which was completed effective July 31, 2004. Under the migration
transaction, our corporate structure was reorganized so that Waste Services, a Delaware company, is
the ultimate parent company of our corporate group. Prior to the migration transaction, Waste
Services was a subsidiary of Capital. After the migration transaction, Capital became Waste
Services subsidiary. Effective with the completion of the
migration on July 31, 2004, the
historical equity balances of Capital were reclassified into the equity of Waste Services. These condensed consolidated financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. All significant intercompany transactions
and accounts have been eliminated. All figures are presented in thousands of U.S. dollars, except
share and per share data, or except where expressly stated as being in Canadian dollars (C$) or
in millions. Certain information related to our organization, significant accounting policies and
footnote disclosures normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States has been condensed or omitted. The
accounting policies followed in the preparation of these interim condensed consolidated financial
statements are consistent with those followed in our annual consolidated financial statements for
the year ended December 31, 2004, as filed on Form 10-K. In the opinion of management, these
unaudited condensed consolidated financial statements contain all material adjustments, consisting
only of normal recurring adjustments, necessary to fairly state our financial position, results of
operations and cash flows for the periods presented and the presentations and disclosures herein
are adequate when read in conjunction with our Form 10-K for the year ended December 31, 2004.
Income taxes during these interim periods have been provided for based upon our anticipated annual
effective income tax rate. Certain reclassifications have been made to the prior period financial
statement amounts to conform to the current presentation. Due to the seasonal nature of our
business, operating results for interim periods are not necessarily indicative of the results for
full years. These interim financial statements should be read in conjunction with our audited
consolidated financial statements and notes thereto appearing in our annual report on Form 10-K for
the year ended December 31, 2004. The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. Significant estimates include
the allowance for doubtful accounts, depletion of landfill development costs, intangible assets,
goodwill, liabilities for landfill capping, closure and post-closure obligations, insurance
reserves, potential liabilities in connection with outstanding litigation and deferred taxes. A portion of our operations are domiciled in Canada; for each reporting period, we translate
the results of operations and financial condition of our Canadian operations into U.S. dollars.
Therefore, reported results of operations and financial condition are subject to changes in the
exchange relationship between the two currencies. For example, as the relationship of the Canadian
dollar strengthens against the U.S. dollar, revenue is favorably affected and conversely expenses
are unfavorably affected. Assets and liabilities of Canadian operations have been translated from
Canadian dollars into U.S. dollars at the exchange rates in effect at the relevant balance sheet
dates, and revenue and expenses of Canadian operations have been translated from Canadian dollars
into U.S. dollars at the average exchange rates prevailing during the period. Unrealized gains and
losses on translation of the Canadian operations into U.S. dollars are reported as a separate
component of shareholders equity and are included in comprehensive income (loss). Separately,
monetary assets and liabilities denominated in U.S. dollars held by our Canadian operations are
re-measured from U.S. dollars into Canadian dollars and then translated into U.S. dollars. The
effects of re-measurement are reported currently as a component of net income (loss). Currently, we
do not hedge our exposure to changes in foreign exchange rates. 6




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WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Basic earnings (loss) per share is calculated by dividing income (loss) available to common
shareholders by the weighted average number of common shares outstanding for the period includes
the effect of currently outstanding exchangeable shares of Waste Services (CA) which are the
functional and economic equivalent of our outstanding common shares. Diluted earnings (loss) per
share is calculated based on the weighted average number of common shares outstanding during the
period plus the dilutive effect of common stock purchase warrants and stock options using the
treasury stock method. Contingently issuable shares are included in the computation of basic
earnings (loss) per share when issuance of the shares is no longer contingent. Due to the net
losses attributable to common shareholders for the three months ended March 31, 2005 and 2004,
basic and diluted loss per share were the same, as the effect of potentially dilutive securities
would have been anti-dilutive. Dilutive securities not included in the diluted loss per share
calculation are as follows (unaudited) (in thousands): Three Months Ended March 31,2005
    
    
    2004Options to purchase common shares
    
    
    31
    
    
    
    1,794Warrants to purchase common shares
    
    
    1,653
    
    
    
    6,635Dilutive securities
    
    
    1,684
    
    
    
    8,429
 For purposes of computing net income (loss) per common share  basic and diluted, for the
three months ended March 31, 2005, the weighted average number of shares of common stock
outstanding includes the effect of 6,512,102 exchangeable shares of Waste Services (CA) as if they
were outstanding common stock on July 31, 2004, the date our migration transaction was completed. 2. New Accounting Pronouncements In December 2004, the FASB issued SFAS No. 123 (revised 2004), Shares-Based Payment, (SFAS
No. 123(R)), which amends SFAS No. 123, Accounting for Stock-Based Compensation (SFAS
123),and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees.SFAS
No. 123(R) requires compensation expense to be recognized for all share-based payments made to
employees based on the fair value of the award at the date of grant, eliminating the intrinsic
value alternative allowed by SFAS No. 123. Generally, the approach to determining fair value under
the original pronouncement has not changed. However, there are revisions to the accounting
guidelines, such as accounting for forfeitures, that will change our accounting for stock-based
awards in the future. The original effective date of SFAS 123 was the first interim or annual reporting period
beginning after June 15, 2005. In April 2005, the Securities and Exchange Commission amended Rule
4-01(a) of Regulation S-X in order to delay the effective date of SFAS 123(R). The amendment
requires that public entities apply the provisions of SFAS 123(R) beginning with the first
annual reporting period of the registrants first fiscal year beginning on or after June 15,
2005. As a result of the amendment, SFAS 123(R) will be effective for us at the beginning of the
first quarter of 2006. The statement allows companies to adopt its provision using either of the
following transition alternatives: (i) The prospective method, which results in the recognition of compensation expense using SFAS
123(R) for all share-based awards granted after the effective date and the recognition of
compensation expense using SFAS 123 for all previously granted share-based awards that remain
unvested at the effective date; or (ii) The retrospective method, which results in applying the prospective method and restating
prior periods by recognizing the financial statement impact of share-based payments in a matter
consistent with the pro forma disclosure requirements of SFAS No. 123. We have not yet determined either the method of adoption or the impact that the new standard
is expected to have on our financial statements. 7




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WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 3. Property and Equipment Property and equipment consist of the following: March 31,
    
    
    December 31,2005
    
    
    2004(Unaudited)Land and buildings
    
    $
    19,444
    
    
    $
    18,872Vehicles
    
    
    92,345
    
    
    
    101,215Containers, compactors, landfill and recycling equipment
    
    
    63,627
    
    
    
    61,550Furniture, fixtures, other office equipment and leasehold improvements
    
    
    8,680
    
    
    
    8,562Total property and equipment
    
    
    184,096
    
    
    
    190,199Less: Accumulated depreciation
    
    
    (62,935
    )
    
    
    (59,732
    )Property and equipment, net
    
    $
    121,161
    
    
    $
    130,467
 4. Landfill Sites, Accrued Closure, Post-Closure and Other Obligations Landfill Sites Landfill sites consist of the following: March 31,
    
    
    December 31,2005
    
    
    2004(Unaudited)Landfill
sites
    
    $
    191,111
    
    
    $
    188,616Accumulated
depletion
    
    
    (21,072
    )
    
    
    (19,000
    )Landfill sites,
net
    
    $
    170,039
    
    
    $
    169,616
 The changes in landfill sites for the three months ended March 31, 2005 and 2004 are as
follows (unaudited): 2005
    
    
    2004Balance, beginning of period
    
    $
    169,616
    
    
    $
    117,541Acquisitions
    
    
    
    
    
    
    36,293Additional landfill site costs
    
    
    2,445
    
    
    
    1,862Additional asset retirement obligations
    
    
    229
    
    
    
    116Depletion
    
    
    (2,155
    )
    
    
    (1,122
    )Effect of foreign exchange rate fluctuations
    
    
    (96
    )
    
    
    (140
    )Change in accounting principle
    
    
    
    
    
    
    (2,474
    )Balance, end of period
    
    $
    170,039
    
    
    $
    152,076
 8




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WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Accrued Closure, Post-Closure and Other Obligations Accrued closure, post-closure and other obligations consist of the following: March 31,
    
    
    December 31,2005
    
    
    2004(Unaudited)Accrued closure and post-closure obligations
    
    $
    6,713
    
    
    $
    6,390Deferred income tax liability
    
    
    5,346
    
    
    
    3,984Capital lease obligations
    
    
    185
    
    
    
    416Other obligations
    
    
    423
    
    
    
    184$
    12,667
    
    
    $
    10,974
 Accrued closure and post-closure obligations include costs associated with obligations
for closure and post-closure of our landfills. The anticipated timeframe for paying these costs
varies based on the remaining useful life of each landfill as well as the duration of the
post-closure monitoring period. The changes to accrued closure and post-closure obligations for the
three months ended March 31, 2005 and 2004 are as follows (unaudited): 2005
    
    
    2004Balance, beginning of period
    
    $
    6,390
    
    
    $
    7,737Acquisitions
    
    
    
    
    
    
    52Accretion
    
    
    121
    
    
    
    123Additional asset retirement obligations
    
    
    229
    
    
    
    116Effect of foreign exchange rate
fluctuations
    
    
    (27
    )
    
    
    (36
    )Change in accounting principle
    
    
    
    
    
    
    (2,831
    )Balance, end of period
    
    $
    6,713
    
    
    $
    5,161
 5. Goodwill and Other Intangible Assets Goodwill and other intangible assets consist of the following: March 31,
    
    
    December 31,2005
    
    
    2004(Unaudited)Other intangible assets subject to amortization:Customer relationships and contracts
    
    $
    35,320
    
    
    $
    50,495Non-competition agreements and other
    
    
    3,239
    
    
    
    4,12638,559
    
    
    
    54,621Less, Accumulated amortization:Customer relationships and contracts
    
    
    (7,499
    )
    
    
    (5,913
    )Non-competition agreements and other
    
    
    (1,592
    )
    
    
    (1,782
    )Other intangible assets subject to amortization, net
    
    
    29,468
    
    
    
    46,926Goodwill
    
    
    304,237
    
    
    
    280,830Goodwill and other intangible assets, net
    
    $
    333,705
    
    
    $
    327,756
 9




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WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) The changes in goodwill for the three months ended March 31, 2005 and 2004 are as follows
(unaudited): 2005
    
    
    2004U.S.
    
    
    Canada
    
    
    Total
    
    
    TotalBalance, beginning of period
    
    $
    195,575
    
    
    $
    85,255
    
    
    $
    280,830
    
    
    $
    144,544Acquisitions
    
    
    9
    
    
    
    
    
    
    
    9
    
    
    
    19,934Effect of foreign exchange rate fluctuations
    
    
    
    
    
    
    (535
    )
    
    
    (535
    )
    
    
    (889
    )Purchase price allocation adjustments
for prior acquisitions and dispositions
    
    
    23,933
    
    
    
    
    
    
    
    23,933
    
    
    
    (209
    )Balance, end of period
    
    $
    219,517
    
    
    $
    84,720
    
    
    $
    304,237
    
    
    $
    163,380
 During the first quarter of 2005,
we revised our estimate of the fair value of customer relationships, non-compete arrangements and certain
vehicles and containers acquired as part of the acquisition of Florida Recycling. 6. Other Assets Other assets consist of the following: March 31,
    
    
    December 31,2005
    
    
    2004(Unaudited)Debt and redeemable Preferred Stock issue costs, net of accumulated amortization
of $2,866 as of March 31, 2005 and $2,271
as of December 31, 2004
    
    $
    10,236
    
    
    $
    10,833Acquisition deposits and deferred acquisition costs
    
    
    12,721
    
    
    
    12,576Deferred income taxes
    
    
    381
    
    
    
    1,202Other assets
    
    
    702
    
    
    
    830$
    24,040
    
    
    $
    25,441
 7. Debt Debt consists of the following: March 31,
    
    
    December 31,2005
    
    
    2004(Unaudited)Senior Secured Credit Facilities:Revolving credit facility, floating interest rate at 7.28% as of March 31, 2005
and 6.71% as of December 31, 2004 due April 2009
    
    $
    15,000
    
    
    $
    15,000Term loan facility, floating interest rate at 7.05% as of March 31, 2005
and 6.78% as of December 31, 2004 due April 2011
    
    
    99,000
    
    
    
    99,250Senior Subordinated Notes fixed interest rate at 9.5% as of
March 31, 2005 and December 31, 2004 due 2014
    
    
    160,000
    
    
    
    160,000Other subordinated promissory notes payable, interest at 6.67%, due through June 2017
    
    
    3,090
    
    
    
    3,130277,090
    
    
    
    277,380Less: Current portion
    
    
    (1,169
    )
    
    
    (1,166
    )Long-term portion
    
    $
    275,921
    
    
    $
    276,214
 10




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WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Senior Secured Credit Facilities On April 30, 2004, we entered into new Senior Secured Credit Facilities (the Credit
Facilities) with a syndicate of lenders. The Credit Facilities consist of a five-year revolving
credit facility in the amount of $60.0 million, up to
$15.0 million of which is available to our
Canadian operations, and a seven-year term loan facility in the amount of $100.0 million. The
Credit Facilities bear interest based upon a spread over base rate or Eurodollar loans, as defined,
at our option. The Credit Facilities are secured by substantially all of the assets of our U.S.
restricted subsidiaries. Our Canadian restricted subsidiaries guarantee and pledge all of their
assets only in support of the portion of the revolving credit facility available to them.
Additionally, 65% of the common shares of Waste Services first tier foreign subsidiaries are
pledged to secure obligations under the Credit Facilities. Our Credit Facilities, as amended, contain certain financial and other covenants that restrict
our ability to, among other things, make capital expenditures, incur indebtedness, incur liens,
dispose of property, repay debt, pay dividends, repurchase shares and make certain acquisitions.
Our financial covenants include (i) minimum consolidated interest coverage; (ii) maximum total
leverage; and (iii) maximum senior secured leverage. On October 4, 2004, we entered into an amendment to the Credit Facilities with the
administrative agent for the lenders. The amendment included changes to certain of the financial
and other covenants contained in the Credit Facilities and increased the current interest rates
payable on amounts outstanding by 125 basis points to 450 basis
points over Eurodollar loans.
Until we meet certain target leverage ratios, as defined, availability under the amended facility
is reduced to $50.0 million, up to $12.5 million of which is available to our Canadian operations.
In connection with the amendment, we paid a fee of approximately $0.5 million to our lenders. As
of March 31, 2005, $15.1 million of capacity remained under the facility. Currently, we are in
compliance with the financial covenants, as amended, and we expect to continue to be in compliance
in future periods. The amendment also required us to receive an equity investment of at least $7.5 million prior
to March 28, 2005. On March 28, 2005, we issued 2,640,845
shares of common stock to Mr. Michael G. DeGroote
for net proceeds of approximately $6.8 million. Additionally, we issued warrants to purchase 264,085 shares of
common stock at an exercise price of $2.84 per share. The warrants remain exercisable until March
28, 2010. New Senior Subordinated Notes On
April 30, 2004, we completed a private offering of 91⁄2% Senior Subordinated Notes
(Subordinated Notes) due 2014 for gross proceeds of $160.0 million. The Subordinated Notes mature
on April 15, 2014. Interest on the Subordinated Notes is payable semi annually on October 15 and
April 15. The Subordinated Notes are redeemable, in whole or in part, at our option, on or after
April 15, 2009, at a redemption price of 104.75% of the principal amount, declining rateably in
annual increments to par on or after April 15, 2012, together with accrued interest to the
redemption date. In addition, prior to April 15, 2007, we may redeem up to 35.0% of the aggregate
principal amount of the Subordinated Notes with the proceeds of certain equity offerings, at a
redemption price equal to 109.5% of the principal amount. Upon a change of control, as such term is
defined in the Indenture, we are required to offer to repurchase all the Subordinated Notes at
101.0% of the principal amount, together with accrued interest and liquidated damages, if any, and
obtain the consent of our senior lenders to such payment or repay our indebtedness under our Credit
Facilities. 11




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WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) The Subordinated Notes are unsecured and are subordinate to our existing and future senior
secured indebtedness, including our Credit Facilities, structurally subordinated to existing and
future indebtedness of our non-guarantor subsidiaries, rank equally with any unsecured senior
subordinated indebtedness and senior to our existing and future subordinated indebtedness. Our
obligations with respect to the Subordinated Notes, including principal, interest, premium, if any,
and liquidated damages, if any, are fully and unconditionally guaranteed on an unsecured, senior
subordinated basis by all of our existing and future domestic restricted subsidiaries. Our Canadian
operations are not guarantors under the Subordinated Notes. The Subordinated Notes contain certain covenants that, in certain circumstances and subject to
certain limitations and qualifications, restrict, among other things; (i) the incurrence of
additional debt; (ii) the payment of dividends and repurchases of stock; (iii) the issuance of
preferred stock and the issuance of stock of our subsidiaries; (iv) certain investments; (v) the
repurchase of our Preferred Stock; (vi) transactions with affiliates; and (vii) certain sales of
assets. We also entered into a Registration Rights Agreement with the initial purchaser of the
Subordinated Notes in which we agreed to (i) file a registration statement with respect to the
Subordinated Notes within 120 days of the closing date of the issuance of the notes (August 28,
2004), pursuant to which we will offer to exchange the Subordinated Notes for registered notes with
terms identical to the Subordinated Notes; (ii) have such registration statement declared effective
within 210 days of the issuance date; (iii) maintain the effectiveness of such registration
statement for minimum periods specified in the agreement; and (iv) file a shelf registration
statement in the circumstances and within the time periods specified in the agreement. As we need
to file our re-audited Florida Recycling financial statements and pro forma financial statements
prior to filing the registration statement, we have not filed the registration statement with
respect to the Subordinated Notes and, therefore, we are required to pay liquidated damages, in
cash, in the amount equal to $0.05 per week per $1,000 in principal amount of the unregistered
Subordinated Notes, for each week that the default continues for the first 90-days following
default (approximately $8,000 per week). Thereafter, the amount of liquidated damages increases by
an additional $0.05 per week per $1,000 in principal amount of unregistered Subordinated Notes for
each subsequent 90-day period until all defaults have been cured, to a maximum of $0.50 per week
per $1,000 in principal amount of unregistered Subordinated Notes outstanding. These liquidated
damages are payable at the same time as interest payments due under the Subordinated Notes.
Currently, our interest penalty approximates $24,000 per week until May 26, 2005, when it will
increase to $32,000 per week. 8. Cumulative Mandatorily Redeemable Preferred Stock In May 2003, we issued 55,000 shares of redeemable Preferred Stock (the Preferred Stock) to
Kelso Investment Associates VI, L.P. and KEP VI, LLC (collectively Kelso), pursuant to the terms
of an agreement dated as of May 6, 2003, as amended in February and June 2004 at a price of $1,000
per share. We also issued to Kelso warrants to purchase 7,150,000 shares of common stock for $3.00
per share. The warrants are exercisable at any time until May 6, 2010. The issuance of the
Preferred Stock resulted in proceeds of approximately $49.5 million, net of fees of approximately
$5.5 million. The shares of Preferred Stock are non-voting. The Preferred Stock entitles the holders to cash dividends of 17.75% per annum compounding and
accruing quarterly in arrears and to a liquidation preference of $1,000 per share, adjusted for any
stock dividend, stock split, reclassification, recapitalization, consolidation or similar event
affecting the Preferred Stock, plus the amount of any accrued but unpaid dividends on such share as
of any date of determination. The liquidation preference approximated $76.6 million as of March
31, 2005. As we are not permitted to declare and pay cash dividends pursuant to the terms of our Credit
Facilities, the dividend payments will accrue. The Preferred Stock, including all accrued and
unpaid dividends, must be redeemed in full by no later than May 6, 2015. Until May 6, 2006, we may
redeem all or any part of the Preferred Stock on payment of the sum of $1,000 per share plus
accrued and unpaid dividends calculated as if the Preferred Stock were redeemed on May 6, 2006, or
approximately $92.7 million. If we do not exercise our option to redeem all of the Preferred Stock
by May 6, 2009, Kelso may require us to initiate a sale of our assets on terms acceptable to our
board consistent with the exercise of their fiduciary duties. Pursuant to an amendment to the
Certificate of Designations dated April 30, 2004, if we determine, after conducting a sale process,
that any such sale would not yield sufficient proceeds to repay in full the indebtedness then
outstanding under our Credit Facilities and the redemption amount of our Subordinated Notes issued
on April 30, 2004, or at least $320.0 million, then we may elect to delay such sale. The sale date
may be delayed until the earliest to occur of (i) the final maturity date of the Subordinated Notes
(April 15, 2014); (ii) the date on which our Credit Facilities and the Subordinated Notes are fully
repaid or otherwise satisfied; or (iii) a sale of our assets to a third party. We refer to this
date as the delayed sale date. If we do not initiate and complete a sale of our assets within 20
months of initiation of the sale process by the holders 12




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WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) of the Preferred Stock, then on notice from the holders of the Preferred Stock, all outstanding
Preferred Stock will become due and payable on the first anniversary of the date on which the
holders of the Preferred Stock gave notice requiring the initiation of a sale process, for a
liquidation amount of 1.20 times the liquidation preference of $1,000 per share. If the sale day
has been delayed, then we are not required to pay this increased liquidation amount until the
delayed sale date. Also pursuant to the Amended Certificate of Designations, if we become subject to a
liquidation or insolvency event (as such terms are defined in our Amended and Restated Credit
Agreement dated April 30, 2004) or in the event of a change of control (as such term is defined in
the Amended Certificate of Designations), all payments and other distributions to holders of
Preferred Stock will be subordinate to the repayment in full of our Credit Facilities. This
provision does not prohibit any accrual or increase in the dividend rate or in the liquidation
preference of the Preferred Stock as provided for in the Amended Certificate of Designations, or
the distribution of additional shares or other equity securities to the holders of the Preferred
Stock, so long as such additional shares or other equity securities are subject to at least
equivalent subordination provisions. In addition, the Amended Certificate of Designations prohibits
us from making any payment or distribution to the holders of Preferred Stock in the event of a sale
of our assets, or the exercise by the holders of the Preferred Stock of their right to require
payment of the liquidation amount of their shares as a result of the failure to consummate a sale
of our assets as described in the preceding paragraph, unless such payment or distribution is
expressly permitted pursuant to the terms of the agreement then governing our Credit Facilities. 9. Commitments and Contingencies Environmental Risks We are subject to liability for environmental damage that our solid waste facilities may
cause, including damage to neighboring landowners or residents, particularly as a result of the
contamination of soil, groundwater or surface water, including damage resulting from conditions
existing prior to our acquisition of such facilities. Pollutants or hazardous substances whose
transportation, treatment, or disposal was arranged by us or our predecessors, may also subject us
to liability for any off-site environmental contamination caused by these pollutants or hazardous
substances. Any substantial liability for environmental damage incurred by us could have a material
adverse effect on our financial condition, results of operations or cash flows. As of the date of
these condensed consolidated financial statements, we estimate the range of reasonably possible
losses related to environmental matters to be insignificant and we are not aware of any such
environmental liabilities that would be material to our operations or financial condition. Legal Proceedings In the normal course of our business and as a result of the extensive governmental regulation
of the solid waste industry, we may periodically become subject to various judicial and
administrative proceedings involving federal, state, provincial or local agencies. In these
proceedings, an agency may seek to impose fines on us or revoke or deny renewal of an operating
permit or license held by us. From time to time, we may also be subject to actions brought by
citizens groups, adjacent landowners or residents in connection with the permitting and licensing
of transfer stations and landfills or allegations related to environmental damage or violations of
the permits and licenses pursuant to which we operate. In addition, we may become party to various claims and suits for alleged damages to persons
and property, alleged violations of certain laws and alleged liabilities arising out of matters
occurring during the normal operation of a waste management business. We are currently involved in
pending litigation with Waste Management of Canada Corporation (formerly Canadian Waste Services
Inc.), which is more fully described in our annual report for the year ended December 31, 2004 as
filed on Form 10-K. There have been no material developments in these claims in the first quarter
of 2005. 13




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WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Our President and Chief Operating Officer, Charles A. Wilcox, is a defendant in a breach of
contract suit filed by Waste Management, Inc. which is more fully described in our annual report for the
year ended December 31, 2004 as filed on Form 10-K. Mr. Wilcox is subject to a temporary order
restraining him from engaging in certain activities adverse to the
interests of Waste Management.
In April 2005, Waste Management filed an amended petition and application for injuction naming us
as a defendant to the suit, claiming, among other things, tortious interference with contractual
relations and seeking compensatory damages from us. We intend to vigorously defend this claim both
with respect to liability and damages. In March 2005, we filed a Complaint against Waste Management, Inc. in the United States District
Court in the Middle District of Florida (Orlando). The Complaint alleges that Waste Management
sought to prevent us from establishing ourselves as an effective competitor to Waste Management in
the State of Florida, by tortiously interfering with our business relationships and committing
antitrust violations under both federal and Florida law. We are seeking in excess of $25.0 million
in damages against Waste Management. If we are successful in our suit under antitrust laws, Waste
Management would be liable for treble damages or in excess of $75.0 million. No provision has been made in these financial statements for the above matters. We do not
currently believe that the possible losses in respect of all or any of these matters would have a
material adverse impact on our business, financial condition, results of operations or cash flows. Surety Bonds, Letters of Credit and Insurance Municipal solid waste services contracts, permits and licenses to operate transfer stations,
landfills and recycling facilities may require performance or surety bonds, letters of credit or
other means of financial assurance to secure contractual performance. As of March 31, 2005 and
December 31, 2004, we had provided customers and various regulatory authorities with such bonds and
letters of credit amounting to approximately $73.7 million and $67.7 million, respectively, to
collateralize our obligations. Our U.S.-based automobile, general liability and workers compensation insurance coverage is
subject to certain deductible limits. We retain up to $0.5 million and $0.25 million of risk per
claim, plus claims handling expense under our workers compensation and our auto and general
liability insurance programs, respectively. Claims in excess of such deductible levels are fully
insured subject to our policy limits. However, we have a limited claims history for our U.S.
operations and it is reasonably possible that recorded reserves may not be adequate to cover future
payments of claims. Adjustments, if any, to our reserves will be reflected in the period in which
the adjustments are known. As of March 31, 2005, we have posted a letter of credit with our U.S.
insurer of approximately $8.4 million to secure the liability for losses within the deductible
limit. Other Contractual Arrangements During December 2003, we issued 600,000 Common Shares as part of the purchase price of an
acquisition. In connection with this acquisition, we entered into a reimbursement agreement whereby
for a period of one year after the second anniversary of the closing date, we will reimburse the
seller for the loss on sale of shares below $4.75 per share. 10. Authorized Capital Stock and Migration Transaction Total Shares We are authorized to issue a total of 505,000,000 shares of capital stock consisting of:  
    500,000,000 shares of common stock, par value US$0.01 per share; and
    5,000,000 shares of preferred stock, par value US$0.01 per share, of which 100,000 have
been designated as Series A Preferred Stock and one has been designated as Special Voting
Preferred Stock. 14




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WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Preferred Stock The Series A Preferred Stock with a par value of $0.01 per share and a liquidation
preference of $1,000.00 per share, have the powers, preferences and other special rights and the
qualifications, limitations and restrictions that are set forth in the Certificate of Designations
of Series A Preferred Stock as amended. 55,000 shares of Series A Preferred Stock are currently
outstanding. The Special Voting Preferred Stock have the rights, preference, and limitations set
forth in the Certificate of Designation of Special Voting Preferred Stock. One share of Special
Voting Preferred Stock is presently outstanding. Migration Transaction As part of our business strategy to expand into the United States, we entered into a migration
transaction effective July 31, 2004. Under the migration transaction, our corporate structure was
reorganized so that Waste Services, a Delaware company, is the ultimate parent company of our
corporate group. Prior to the migration transaction, Waste Services was a subsidiary of Capital.
After the migration transaction, Capital, now Waste Services (CA), became our subsidiary. The migration transaction occurred by way of a plan of arrangement under Section 182 of the
Business Corporations Act (Ontario) and consisted primarily of: (1) the exchange of 87,657,035
common shares of Capital for 87,657,035 shares of common stock of Waste Services and (2) the
conversion of the remaining 9,229,676 common shares of Capital held by non-US residents who elected
to receive exchangeable shares into 9,229,676 exchangeable shares of Waste Services (CA). The
transaction was approved by the Ontario Superior Court of Justice July 30, 2004 and by our
shareholders at a special meeting held on July 27, 2004. The terms of the exchangeable shares of Waste Services (CA) are the economic and functional
equivalent of our common stock. Holders of exchangeable shares (1) will receive the same dividends
as holders of shares of common stock and (2) will be entitled to vote on the same matters as
holders of shares of our common stock. Such voting is accomplished through the one share of Special
Voting Preferred Stock held by Computershare Trust Company of Canada as trustee, which will vote on
the instructions of the holders of the exchangeable shares (one vote for each exchangeable share).
As such, the exchangeable shares are included as additional paid in capital. Upon the occurrence of certain events, such as the liquidation of Waste Services (CA), or
after the redemption date, our Canadian holding company, Capital Holdings will have the right to
purchase each exchangeable share for a share of our common stock, plus all declared and unpaid
dividends on the exchangeable share. Unless certain events occur, such redemption date will not be
earlier than December 31, 2016. Holders of exchangeable shares also have the right at any time at
their option, to exchange their exchangeable shares for shares of our common stock. 11. Employee and Director Stock Option Plans and Option Grants We have stock-based compensation plans accounted for under the recognition and measurement
principles of Accounting Principles Board Opinion (APB) No. 25 Accounting for Stock Issued to
Employees, and related interpretations. Pro forma information regarding the impact of
stock-based compensation on net income and earnings per share is required by SFAS No. 123
Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. Such unaudited pro forma information, determined as if
we had accounted for our employee stock options under the fair value recognition provisions of SFAS
No. 123, is illustrated in the following table (unaudited): 15




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WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Three Months Ended March 312005
    
    
    2004Net loss attributable to Common Shareholders as reported
    
    $
    (14,267
    )
    
    $
    (10,734
    )Stock-based employee compensation expense
pursuant to SFAS No. 123
    
    
    (2,363
    )
    
    
    (2,415
    )Pro forma net loss attributable to Common Shareholders
    
    $
    (16,630
    )
    
    $
    (13,149
    )Basic and diluted loss per share:As reported
    
    $
    (0.15
    )
    
    $
    (0.15
    )Pro forma
    
    $
    (0.17
    )
    
    $
    (0.19
    )
 The fair value of options
granted is estimated using the Black-Scholes
option pricing model using the following assumptions: Three Months EndedMarch 31,2005
    
    2004Annual dividend yield
    
    
    
    
    
    
    Weighted-average expected life (years)
    
    N/A
    
    3 yearsRisk-free interest rate
    
    N/A
    
    2.97%
to 4.62%Volatility
    
    
    N/A
    
    
    
    72
    %
 Details
of our 1997 and 1999 Stock Option Plans are described in our consolidated financial
statements for the year ended December 31, 2004 filed on Form 10-K. Our options are denominated in
U.S. and Canadian dollars. During the three months ended March 31, 2005, no options to purchase
shares of our common stock were granted. As of March 31, 2005, the weighted average exercise price for options
outstanding was $4.61 and C$6.47 for U.S. and Canadian dollar denominated options, respectively.
During the three months ended March 31, 2005, no options were exercised and 18,500 options expired
or were terminated. As of March 31, 2005, the aggregate number of options outstanding entitled
holders to purchase 12,627,464 shares of common stock at prices ranging from $2.70 to $6.25 and C$3.23 to
C$18.05 for U.S. and Canadian dollar denominated options, respectively. 12. Comprehensive Loss Comprehensive income (loss) includes the effects of foreign currency translation.
Comprehensive income (loss) for the three months ended March 31, 2005 and 2004 are as follows
(unaudited): 2005
    
    
    2004Net loss
    
    $
    (14,267
    )
    
    $
    (10,734
    )Foreign currency translation
adjustment
    
    
    (1,226
    )
    
    
    (2,166
    )Comprehensive loss
    
    $
    (15,493
    )
    
    $
    (12,900
    )
 16




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WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 13. Segment Information We have determined our operating and reporting segments pursuant to the requirements of SFAS
No. 131, Disclosures about Segments of an Enterprise and Related Information. In making
this determination, we considered our organization/reporting structure and the information used by
our chief operating decision makers to make decisions about resource allocation and performance
assessment. We are organized along geographic locations or regions within the U.S. and Canada. Our
Canadian operations are organized between two regions, Eastern and Western Canada while the U.S. is
organized into Florida (North, Central, Gulf), Texas and Arizona. We believe our domestic U.S. and
our Canadian geographic segments meet the Aggregation Criteria set forth in SFAS 131 for the
following reasons: (i) the nature of the service, waste collection and disposal is economically the
same and transferable across locations; (ii) the type and class of customer is consistent among
regions/districts; (iii) the methods used to deliver services are essentially the same (e.g.
containers collect waste at market locations and trucks collect and transfer waste to landfills);
and (iv) the regulatory environment is consistent within Canada and the U.S., respectively. For
further information regarding our segments see Note 14. 14. Condensed Consolidating Financial Statements We
are the primary obligor under the Subordinated Notes,
however we have no independent assets or operations, and the guarantees of
our domestic restricted
subsidiaries are full and unconditional and joint and several with respect to the Senior
Subordinated Notes, including principal, interest, premium, if any, and liquidated damages, if any.
Our Canadian operations are not guarantors under the Senior Subordinated Notes. Presented below
are our Consolidating Condensed Balance Sheets as of March 31, 2005 and December 31, 2004 and the
related Unaudited Condensed Consolidating Statements of Operations and Cash Flows for the three
months ended March 31, 2005 and 2004 of our guarantor subsidiaries, our U.S.
operating and reporting segments, (Guarantors) and the subsidiaries which are not guarantors, our
Canadian operating and reporting segments, (Non-guarantors): 17




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WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) March 31, 2005 (Unaudited)Guarantors
    
    
    Non-Guarantors
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    10,171
    
    
    $
    1,873
    
    
    $
    
    
    
    $
    12,044Accounts receivable, net
    
    
    24,972
    
    
    
    21,173
    
    
    
    
    
    
    
    46,145Prepaid expenses and other current assets
    
    
    5,655
    
    
    
    4,040
    
    
    
    
    
    
    
    9,695Total current assets
    
    
    40,798
    
    
    
    27,086
    
    
    
    
    
    
    
    67,884Property and equipment, net
    
    
    57,773
    
    
    
    63,388
    
    
    
    
    
    
    
    121,161Landfill sites, net
    
    
    156,877
    
    
    
    13,162
    
    
    
    
    
    
    
    170,039Goodwill and other intangible assets, net
    
    
    247,254
    
    
    
    86,451
    
    
    
    
    
    
    
    333,705Other assets
    
    
    11,139
    
    
    
    12,901
    
    
    
    
    
    
    
    24,040Investment in subsidiary
    
    
    137,179
    
    
    
    
    
    
    
    (137,179
    )
    
    
    Total assets
    
    $
    651,020
    
    
    $
    202,988
    
    
    $
    (137,179
    )
    
    $
    716,829LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    13,640
    
    
    $
    7,939
    
    
    $
    
    
    
    $
    21,579Accrued expenses and other current liabilities
    
    
    35,570
    
    
    
    9,781
    
    
    
    
    
    
    
    45,351Short-term financing and current portion of long-term debt
    
    
    1,169
    
    
    
    
    
    
    
    
    
    
    
    1,169Total current
liabilities
    
    
    50,379
    
    
    
    17,720
    
    
    
    
    
    
    
    68,099Long-term debt
    
    
    275,921
    
    
    
    
    
    
    
    
    
    
    
    275,921Accrued closure, post-closure and other obligations
    
    
    7,297
    
    
    
    5,370
    
    
    
    
    
    
    
    12,667Cumulative mandatorily redeemable Preferred Stock, net
    
    
    69,586
    
    
    
    
    
    
    
    
    
    
    
    69,586Total liabilities
    
    
    403,183
    
    
    
    23,090
    
    
    
    
    
    
    
    426,273Shareholders equity:Common stock
    
    
    931
    
    
    
    
    
    
    
    
    
    
    
    931Additional paid-in capital
    
    
    328,531
    
    
    
    
    
    
    
    23,483
    
    
    
    352,014Treasury stock
    
    
    (1,235
    )
    
    
    
    
    
    
    
    
    
    
    (1,235
    )Exchangeable
shares of Waste Services (CA)
    
    
    
    
    
    
    33,022
    
    
    
    (33,022
    )
    
    
    Common stock
of Waste Services (CA)
    
    
    
    
    
    
    112,331
    
    
    
    (112,331
    )
    
    
    Options, warrants and deferred stock-based compensation
    
    
    14,404
    
    
    
    15,014
    
    
    
    
    
    
    
    29,418Accumulated other comprehensive income
    
    
    11,151
    
    
    
    27,907
    
    
    
    (11,151
    )
    
    
    27,907Accumulated deficit
    
    
    (105,945
    )
    
    
    (8,376
    )
    
    
    (4,158
    )
    
    
    (118,479
    )Total shareholders equity
    
    
    247,837
    
    
    
    179,898
    
    
    
    (137,179
    )
    
    
    290,556Total liabilities and shareholders
equity
    
    $
    651,020
    
    
    $
    202,988
    
    
    $
    (137,179
    )
    
    $
    716,829
 18




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##### Table of Contents



WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) December 31, 2004Guarantors
    
    
    Non-Guarantors
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    6,223
    
    
    $
    2,284
    
    
    $
    
    
    
    $
    8,507Accounts receivable, net
    
    
    24,509
    
    
    
    23,347
    
    
    
    
    
    
    
    47,856Prepaid expenses and other current assets
    
    
    6,440
    
    
    
    4,500
    
    
    
    
    
    
    
    10,940Total current assets
    
    
    37,172
    
    
    
    30,131
    
    
    
    
    
    
    
    67,303Property and equipment, net
    
    
    64,805
    
    
    
    65,662
    
    
    
    
    
    
    
    130,467Landfill sites, net
    
    
    155,710
    
    
    
    13,906
    
    
    
    
    
    
    
    169,616Goodwill and other intangible assets, net
    
    
    240,578
    
    
    
    87,178
    
    
    
    
    
    
    
    327,756Other assets
    
    
    12,105
    
    
    
    13,336
    
    
    
    
    
    
    
    25,441Investment in subsidiary
    
    
    140,907
    
    
    
    
    
    
    
    (140,907
    )
    
    
    Total assets
    
    $
    651,277
    
    
    $
    210,213
    
    
    $
    (140,907
    )
    
    $
    720,583LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    15,757
    
    
    $
    10,192
    
    
    $
    
    
    
    $
    25,949Accrued expenses and other current liabilities
    
    
    31,104
    
    
    
    11,429
    
    
    
    
    
    
    
    42,533Short-term financing and current portion of long-term debt
    
    
    1,166
    
    
    
    
    
    
    
    
    
    
    
    1,166Total current
liabilities
    
    
    48,027
    
    
    
    21,621
    
    
    
    
    
    
    
    69,648Long-term debt
    
    
    276,214
    
    
    
    
    
    
    
    
    
    
    
    276,214Accrued closure, post-closure and other obligations
    
    
    5,628
    
    
    
    5,346
    
    
    
    
    
    
    
    10,974Cumulative mandatorily redeemable Preferred Stock, net
    
    
    64,971
    
    
    
    
    
    
    
    
    
    
    
    64,971Total liabilities
    
    
    394,840
    
    
    
    26,967
    
    
    
    
    
    
    
    421,807Shareholders equity:Common stock
    
    
    904
    
    
    
    
    
    
    
    
    
    
    
    904Additional paid-in capital
    
    
    322,400
    
    
    
    
    
    
    
    23,504
    
    
    
    345,904Treasury stock
    
    
    (1,235
    )
    
    
    
    
    
    
    
    
    
    
    (1,235
    )Exchangeable
shares of Waste Services (CA)
    
    
    
    
    
    
    33,022
    
    
    
    (33,022
    )
    
    
    Common stock
of Waste Services (CA)
    
    
    
    
    
    
    115,964
    
    
    
    (115,964
    )
    
    
    Options, warrants and deferred stock-based compensation
    
    
    13,774
    
    
    
    14,508
    
    
    
    
    
    
    
    28,282Accumulated other comprehensive income
    
    
    12,274
    
    
    
    29,133
    
    
    
    (12,274
    )
    
    
    29,133Accumulated deficit
    
    
    (91,680
    )
    
    
    (9,381
    )
    
    
    (3,151
    )
    
    
    (104,212
    )Total shareholders equity
    
    
    256,437
    
    
    
    183,246
    
    
    
    (140,907
    )
    
    
    298,776Total liabilities and shareholders
equity
    
    $
    651,277
    
    
    $
    210,213
    
    
    $
    (140,907
    )
    
    $
    720,583
 19




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##### Table of Contents



WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) March 31, 2005 (Unaudited)Guarantors
    
    
    Non-Guarantors
    
    
    Eliminations
    
    
    ConsolidatedRevenue
    
    $
    52,841
    
    
    $
    36,144
    
    
    $
    
    
    
    $
    88,985Operating and other expenses:Cost of
operations (exclusive of depreciation, depletion and amortization)
    
    
    39,567
    
    
    
    24,923
    
    
    
    
    
    
    
    64,490Selling, general and administrative expense
(exclusive of stock-based compensation)
    
    
    9,565
    
    
    
    5,396
    
    
    
    
    
    
    
    14,961Stock-based compensation expense
    
    
    
    
    
    
    506
    
    
    
    
    
    
    
    506Depreciation, depletion and amortization
    
    
    5,410
    
    
    
    4,139
    
    
    
    
    
    
    
    9,549Foreign exchange gain and other
    
    
    (82
    )
    
    
    (156
    )
    
    
    
    
    
    
    (238
    )Equity earning investees
    
    
    (1,007
    )
    
    
    
    
    
    
    1,007
    
    
    
    Income (loss) from operations
    
    
    (612
    )
    
    
    1,336
    
    
    
    (1,007
    )
    
    
    (283
    )Interest expense (income)
    
    
    7,450
    
    
    
    (625
    )
    
    
    
    
    
    
    6,825Cumulative mandatorily redeemable preferred stock dividends and
amortization of issue costs
    
    
    4,842
    
    
    
    
    
    
    
    
    
    
    
    4,842Income
(loss) before income taxes
    
    
    (12,904
    )
    
    
    1,961
    
    
    
    (1,007
    )
    
    
    (11,950
    )Income tax provision
    
    
    1,363
    
    
    
    954
    
    
    
    
    
    
    
    2,317Net
income (loss)
    
    
    (14,267
    )
    
    
    1,007
    
    
    
    (1,007
    )
    
    
    (14,267
    )Net
income (loss) attributable to Common Shareholders
    
    $
    (14,267
    )
    
    $
    1,007
    
    
    $
    (1,007
    )
    
    $
    (14,267
    )
 20




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##### Table of Contents



WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) March 31, 2004 (Unaudited)Guarantors
    
    
    Non-Guarantors
    
    
    Eliminations
    
    
    ConsolidatedRevenue
    
    $
    20,000
    
    
    $
    30,317
    
    
    $
    
    
    
    $
    50,317Operating and other expenses:Cost of
operations (exclusive of depreciation, depletion and amortization)
    
    
    13,271
    
    
    
    21,016
    
    
    
    
    
    
    
    34,287Selling, general and administrative expense
(exclusive of stock-based
compensation)
    
    
    5,630
    
    
    
    6,320
    
    
    
    
    
    
    
    11,950Stock-based compensation expense (benefit)
    
    
    
    
    
    
    (1,391
    )
    
    
    
    
    
    
    (1,391
    )Depreciation, depletion and amortization
    
    
    2,026
    
    
    
    3,446
    
    
    
    
    
    
    
    5,472Foreign exchange gain and other
    
    
    
    
    
    
    (206
    )
    
    
    
    
    
    
    (206
    )Equity loss investees
    
    
    
    
    
    
    12,371
    
    
    
    (12,371
    )
    
    
    Income (loss) from operations
    
    
    (927
    )
    
    
    (11,239
    )
    
    
    12,371
    
    
    
    205Interest expense
    
    
    6,772
    
    
    
    (456
    )
    
    
    
    
    
    
    6,316Cumulative mandatorily redeemable preferred stock dividends and
amortization of issue costs
    
    
    4,019
    
    
    
    
    
    
    
    
    
    
    
    4,019Loss before income taxes
    
    
    (11,718
    )
    
    
    (10,783
    )
    
    
    12,371
    
    
    
    (10,130
    )Income tax provision
    
    
    653
    
    
    
    176
    
    
    
    
    
    
    
    829Loss before cumulative effect of change in accounting principle
    
    
    (12,371
    )
    
    
    (10,959
    )
    
    
    12,371
    
    
    
    (10,959
    )Cumulative effect of change in accounting principle, net of provision
for income taxes of $132 for the period ended March 31, 2004
    
    
    
    
    
    
    225
    
    
    
    
    
    
    
    225Net loss
    
    
    (12,371
    )
    
    
    (10,734
    )
    
    
    12,371
    
    
    
    (10,734
    )Net loss attributable to Common Shareholders
    
    $
    (12,371
    )
    
    $
    (10,734
    )
    
    $
    12,371
    
    
    $
    (10,734
    )
 21




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##### Table of Contents



WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) March 31, 2005 (Unaudited)Guarantors
    
    
    Non-Guarantors
    
    
    Eliminations
    
    
    ConsolidatedCash flows from operating activities:
    
    $
    (777
    )
    
    $
    5,055
    
    
    $
    
    
    
    $
    4,278Cash flows from investing activities:Cash used in business combinations and significant asset
acquisitions, net of cash acquired
    
    
    (639
    )
    
    
    
    
    
    
    
    
    
    
    (639
    )Capital expenditures
    
    
    (5,253
    )
    
    
    (1,551
    )
    
    
    
    
    
    
    (6,804
    )Proceeds from business divestitures
    
    
    130
    
    
    
    323
    
    
    
    
    
    
    
    453Deposits for business acquisitions and other
    
    
    11
    
    
    
    (409
    )
    
    
    
    
    
    
    (398
    )Intercompany
    
    
    
    
    
    
    (3,641
    )
    
    
    3,641
    
    
    
    (5,751
    )
    
    
    (5,278
    )
    
    
    3,641
    
    
    
    (7,388
    )Cash flows from financing activities:Principal repayments of debt
    
    
    (290
    )
    
    
    (112
    )
    
    
    
    
    
    
    (402
    )Sale of common shares and warrants
    
    
    7,125
    
    
    
    
    
    
    
    
    
    
    
    7,125Intercompany
    
    
    3,641
    
    
    
    
    
    
    
    (3,641
    )
    
    
    10,476
    
    
    
    (112
    )
    
    
    (3,641
    )
    
    
    6,723Effect of exchange rate changes on cash and cash equivalents
    
    
    
    
    
    
    (76
    )
    
    
    
    
    
    
    (76
    )Increase
(decrease) in cash and cash equivalents
    
    
    3,948
    
    
    
    (411
    )
    
    
    
    
    
    
    3,537Cash and cash equivalents, beginning of period
    
    
    6,223
    
    
    
    2,284
    
    
    
    
    
    
    
    8,507Cash and cash equivalents, end of period
    
    $
    10,171
    
    
    $
    1,873
    
    
    $
    
    
    
    $
    12,044
 22




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##### Table of Contents



WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) March 31, 2004 (Unaudited)Guarantors
    
    
    Non-Guarantors
    
    
    Eliminations
    
    
    ConsolidatedCash flows from operating activities:
    
    $
    (5,901
    )
    
    $
    5,737
    
    
    $
    
    
    
    $
    (164
    )Cash flows from investing activities:Cash used in business combinations and significant asset
acquisitions, net of cash acquired
    
    
    (27,734
    )
    
    
    (1,124
    )
    
    
    
    
    
    
    (28,858
    )Capital expenditures
    
    
    (5,355
    )
    
    
    (3,852
    )
    
    
    
    
    
    
    (9,207
    )Proceeds from business divestitures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deposits for business acquisitions and other
    
    
    (567
    )
    
    
    (1,878
    )
    
    
    
    
    
    
    (2,445
    )Intercompany
    
    
    
    
    
    
    (9,491
    )
    
    
    9,491
    
    
    
    (33,656
    )
    
    
    (16,345
    )
    
    
    9,491
    
    
    
    (40,510
    )Cash flows from financing activities:Proceeds from issuance of debt
    
    
    12,000
    
    
    
    
    
    
    
    
    
    
    
    12,000Principal repayments of debt
    
    
    (37
    )
    
    
    (382
    )
    
    
    
    
    
    
    (419
    )Proceeds from release of restricted cash and release of collateral
supporting letters of credit
    
    
    13,434
    
    
    
    976
    
    
    
    
    
    
    
    14,410Proceeds from the exercise of options and warrants
    
    
    
    
    
    
    241
    
    
    
    
    
    
    
    241Fees paid for financing transactions
    
    
    (665
    )
    
    
    
    
    
    
    
    
    
    
    (665
    )Intercompany
    
    
    9,491
    
    
    
    
    
    
    
    (9,491
    )
    
    
    34,223
    
    
    
    835
    
    
    
    (9,491
    )
    
    
    25,567Effect of exchange rate changes on cash and cash equivalents
    
    
    
    
    
    
    (138
    )
    
    
    
    
    
    
    (138
    )Decrease in cash and cash equivalents
    
    
    (5,334
    )
    
    
    (9,911
    )
    
    
    
    
    
    
    (15,245
    )Cash and cash equivalents, beginning of period
    
    
    8,843
    
    
    
    12,219
    
    
    
    
    
    
    
    21,062Cash and cash equivalents, end of period
    
    $
    3,509
    
    
    $
    2,308
    
    
    $
    
    
    
    $
    5,817
 23




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##### Table of Contents



Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the Unaudited Condensed
Consolidated Financial Statements and Notes thereto included elsewhere herein as well as our annual
report on Form 10-K for the year ended December 31, 2004, as filed with the Securities and Exchange
Commission, including the factors set forth in the section titled Forward Looking Statements
under the heading Risk Factors as well as our other filings made with the Securities and Exchange
Commission. Overview We are a multi-regional, integrated solid waste services company, providing collection,
transfer, landfill disposal and recycling services for commercial, industrial and residential
customers in the United States and Canada. In 2003, we initiated a disposal-based growth strategy
to enter the United States solid waste market and establish leading, vertically integrated market
positions. Under this strategy, we enter geographic markets with attractive growth or competitive
characteristics by acquiring and developing landfill disposal capacity, then acquiring and
developing waste collection and transfer operations. As part of our business strategy to expand
into the United States, we entered into a migration transaction which was completed effective July
31, 2004. Under the migration transaction, our corporate structure was reorganized so that Waste
Services, a Delaware company and former subsidiary of Capital Environmental Resource Inc. became
the ultimate parent company of our corporate group. Sources of Revenue Our revenue consists primarily of fees charged to customers for solid waste collection,
landfill disposal, transfer and recycling services. We derive a substantial portion of our collection revenue from services provided to
commercial, industrial and residential customers that are generally performed under service
agreements or pursuant to contracts with municipalities. We recognize revenue when services are
rendered. Amounts billed to customers prior to providing the related services are reflected as
deferred revenue and reported as revenue in the periods in which the services are rendered. We provide collection services for commercial and industrial customers generally under one to
five year service agreements. We determine the fees we charge our customers based on a variety of
factors, including collection frequency, level of service, route density, the type, volume and
weight of the waste collected, type of equipment and containers furnished, the distance to the
disposal or processing facility, the cost of disposal or processing and prices charged by
competitors for similar services. Our contracts with commercial and industrial customers typically
allow us to pass on increased costs resulting from variable items such as disposal and fuel costs
and surcharges. Our ability to pass on cost increases is however, sometimes limited by the terms of
our contracts. We provide residential waste collection services through a variety of contractual
arrangements, including contracts with municipalities, owners and operators of large residential
complexes, mobile home parks and homeowners associations or subscription arrangements with
individual homeowners. Our contracts with municipalities are typically for a term of up to five
years and contain a formula, generally based on a predetermined published price index, for
automatic adjustments to fees to cover increases in some, but not all, of our operating costs.
Certain of our contracts with municipalities contain renewal provisions. The fees we charge for
residential solid waste collection services provided on a subscription basis are based primarily on
route density, the frequency and level of service, the distance to the disposal or processing
facility, the cost of disposal or processing and prices we charge in the market for similar
services. We
charge our landfill and transfer station customers a tipping fee on a
per ton or per yard basis for
disposing of their solid waste at our transfer stations and landfills. We generally base our
landfill tipping fees on market factors and the type and weight of, or volume of the waste
deposited. We generally base our transfer station tipping fees on market factors and the cost of
processing the waste deposited at the transfer station, the cost of transporting the waste to a
disposal facility and the cost of disposal. Material recovery facilities generate revenue from the sale of recyclable commodities. In an
effort to reduce our exposure to commodity price fluctuations on recycled materials, where
competitive pressures permit, we charge collection or processing fees for recycling volume
collected from our customers. Expense Structure Our cost of operations primarily includes tipping fees and related disposal costs, labor and
related benefit costs, equipment maintenance, fuel, vehicle and workers compensation insurance and
landfill capping, closure and post-closure costs. Our strategy is to create vertically integrated
operations where possible, using transfer stations to link
collections operations with our landfills to increase internalization
of our waste volume. Internalization lowers our disposal costs by allowing us to
eliminate tipping fees otherwise paid to an 24




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##### Table of Contents



independent landfill or transfer station operator. We believe internalization provides us with
a competitive advantage by allowing us to be a low cost provider in our markets. Historically our
internalization has been relatively low, but as a result of our new landfills in Florida and
Arizona we expect our internalization will gradually increase over time as we develop our network
of transfer stations and maximize delivery of our collection volumes to these landfill sites. In markets where we do not have our own landfills, we seek to secure long-term disposal
arrangements with municipalities or private owners of landfills or transfer stations. In these
markets, our ability to maintain competitive prices for our collection services is generally
dependent upon our ability to secure low cost disposal pricing. If owners of third party disposal
sites discontinue our arrangements, we would have to seek alternative disposal sites which could
impact our profitability and cash flow. In addition, if third party disposal sites increase their
tipping fees and we are unable to pass these increases on to our collection customers, our
profitability and cash flow would be negatively impacted. We believe the age and condition of a fleet has a significant impact on operating costs
including, but not limited to, repairs and maintenance, insurance and driver training and retention
costs. Through capital investment, we seek to maintain an average fleet age of approximately six
years. We believe this enables us to minimize our repair and maintenance costs, safety and
insurance costs and employee turnover related costs. Selling, general and administrative expense includes managerial costs, information systems,
sales force, administrative expenses and professional fees. We have made a significant investment
in information systems and in assembling our management team to support our growth strategy. We
expect selling, general and administrative expense as a percentage of revenue to be lower in 2005
than 2004 as we spread our overhead costs over a larger revenue base. Depreciation, depletion and amortization expense includes depreciation of fixed assets over
their estimated useful lives using the straight-line method, depletion of landfill costs, including
capping, closure and post-closure obligations using the units-of-consumption method, and
amortization of intangible assets including customer relationships and contracts and covenants
not-to-compete which are amortized over the expected life of the benefit to be received by such
intangibles. We capitalize certain third party costs related to pending acquisitions or development
projects. These costs remain deferred until we cease to be engaged on a regular and ongoing basis
with completion of the proposed acquisition, at which point they are charged currently to earnings.
In the event that the target is acquired, these costs are incorporated in the cost of the acquired
business. We expense indirect and internal costs including executive salaries, overhead and travel
costs related to acquisitions as they are incurred. Factors that Might Affect Future Results We have recently acquired and commenced operations at three large municipal solid waste
landfill sites in the United States that we believe will materially affect our revenue,
profitability and cash flow going forward. The following summarizes our three recently acquired landfills:  
    JED Landfill  a municipal sold waste landfill with 23.7 million cubic yards of initial
permitted capacity, located in Osceola County, Florida. The landfill is located
approximately 20 miles south of metropolitan Orlando and is well positioned to serve the
Orlando metropolitan area and the surrounding counties. The facility opened for operation in
the first quarter of 2004. Part of our strategy is to maximize the internalization of waste
volumes to our JED Landfill. The execution of this strategy is dependent partly upon the
opening of two transfer stations in central Florida. The Taft transfer station and recycling
facility, located south of Orlando, is owned and operated by a third party with whom we have
entered into a 10-year disposal agreement. The Taft facility has received a modified permit
allowing it to accept an average of 1,000 tons of Class I and Class III solid waste combined per
day, subject to completion of certain building modifications. Actual
operating rates may vary depending upon business conditions. The Taft facility has also
received a temporary operating permit which will allow it to accept waste during the
construction period, and we expect to begin disposing waste at the Taft facility in the
second quarter of 2005. The other transfer station and recycling facility, located in Sanford,
Florida, is fully permitted to accept an average of 4,000 cubic yards per day of Class 1 and III
municipal solid waste upon completion of construction which is expected in the second
quarter of 2005. Ownership of the Sanford facility, also referred to as the Ice House
facility, will be transferred to us upon completion of construction pursuant to the terms of
our settlement agreement with the former owners of Florida Recycling.
    Cactus Regional Landfill  a municipal solid waste landfill with 224.0 million cubic
yards of initial permitted capacity with expected utilization of 196 million cubic yards,
located in Pinal County, Arizona. The landfill is located between Phoenix and Tucson,
Arizona and is well-positioned to serve both markets. The facility opened for operation in
the third quarter of 2004. Also in the second and third quarters of 2004, we began
operations at our two newly constructed transfer stations in the Phoenix market area. 25




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##### Table of Contents




    Fort Bend Regional Landfill  a municipal and industrial solid waste landfill with 47.6
million cubic yards of initial permitted capacity, located in Fort Bend County, Texas. The
landfill is located approximately 15 miles southwest of metropolitan Houston and is
well-positioned to serve the Houston metropolitan area, including Fort Bend County. The
facility opened for operation in the third quarter of 2004. We have constructed a transfer
station in Houston, which is permitted to accept up to 850 tons per day of municipal solid
waste and began operations in January 2005. Results of Operations for the Three Months Ended March 31, 2005 and 2004 Certain of our operations are domiciled in Canada; as such, we translate the results of
operations and financial condition of our Canadian operations into U.S. dollars. Therefore,
reported results of operations and financial condition are subject to changes in the exchange
relationship between the two currencies. For example, as the relationship of the Canadian dollar
strengthens against the U.S. dollar, revenue is favorably affected and conversely expenses are
unfavorably affected. Assets and liabilities of Canadian operations have been translated from
Canadian dollars into U.S. dollars at the exchange rates in effect at the relevant balance sheet
dates, and revenue and expenses of Canadian operations have been translated from Canadian dollars
into U.S. dollars at the average exchange rates prevailing during the period. Unrealized gains and
losses on translation of the Canadian operations into U.S. dollars are reported as a separate
component of shareholders equity and are included in comprehensive income (loss). Separately,
monetary assets and liabilities denominated in U.S. dollars held by our Canadian operations are
re-measured from U.S. dollars into Canadian dollars and then translated into U.S. dollars. The
effects of re-measurement are reported currently as a component of net income (loss). Currently, we
do not hedge our exposure to changes in foreign exchange rates. Our consolidated results of operations for the three months ended March 31, 2005 and 2004 by
geographic segment are as follows (in thousands): 2005U.S.
    
    
    
    
    
    
    Canada
    
    
    
    
    
    
    TotalRevenue
    
    $
    52,841
    
    
    
    100.0
    %
    
    $
    36,144
    
    
    
    100.0
    %
    
    $
    88,985
    
    
    
    100.0
    %Operating expenses:Cost of operations
    
    
    39,567
    
    
    
    74.9
    %
    
    
    24,923
    
    
    
    69.0
    %
    
    
    64,490
    
    
    
    72.5
    %Selling, general and
administrative expense
    
    
    9,565
    
    
    
    18.1
    %
    
    
    5,396
    
    
    
    14.9
    %
    
    
    14,961
    
    
    
    16.8
    %Stock-based compensation expense
    
    
    
    
    
    
    0.0
    %
    
    
    506
    
    
    
    1.4
    %
    
    
    506
    
    
    
    0.6
    %Depreciation, depletion
and amortization
    
    
    5,410
    
    
    
    10.2
    %
    
    
    4,139
    
    
    
    11.5
    %
    
    
    9,549
    
    
    
    10.7
    %Foreign exchange loss
and other
    
    
    (82
    )
    
    
    -0.2
    %
    
    
    (156
    )
    
    
    -0.4
    %
    
    
    (238
    )
    
    
    -0.3
    %Income (loss) from operations
    
    $
    (1,619
    )
    
    
    -3.0
    %
    
    $
    1,336
    
    
    
    3.6
    %
    
    $
    (283
    )
    
    
    -0.3
    %
 26




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##### Table of Contents



2004U.S.
    
    
    
    
    
    
    Canada
    
    
    
    
    
    
    TotalRevenue
    
    $
    20,000
    
    
    
    100.0
    %
    
    $
    30,317
    
    
    
    100.0
    %
    
    $
    50,317
    
    
    
    100.0
    %Operating expenses:Cost of operations
    
    
    13,271
    
    
    
    66.4
    %
    
    
    21,016
    
    
    
    69.3
    %
    
    
    34,287
    
    
    
    68.1
    %Selling, general and
administrative expense
    
    
    5,630
    
    
    
    28.2
    %
    
    
    6,320
    
    
    
    20.8
    %
    
    
    11,950
    
    
    
    23.7
    %Stock-based compensation expense
    
    
    
    
    
    
    0.0
    %
    
    
    (1,391
    )
    
    
    -4.6
    %
    
    
    (1,391
    )
    
    
    -2.8
    %Depreciation, depletion
and amortization
    
    
    2,026
    
    
    
    10.1
    %
    
    
    3,446
    
    
    
    11.4
    %
    
    
    5,472
    
    
    
    10.9
    %Foreign exchange loss
and other
    
    
    
    
    
    
    0.0
    %
    
    
    (206
    )
    
    
    -0.7
    %
    
    
    (206
    )
    
    
    -0.4
    %Income (loss) from operations
    
    $
    (927
    )
    
    
    -4.7
    %
    
    $
    1,132
    
    
    
    3.8
    %
    
    $
    205
    
    
    
    0.5
    %
 Revenue A summary of our revenue for the three months ended March 31, 2005 and 2004 is as follows (in
thousands): 2005
    
    
    
    
    
    
    2004Collection
    
    $
    75,340
    
    
    
    78.9
    %
    
    $
    40,395
    
    
    
    75.3Landfill disposal
    
    
    7,723
    
    
    
    8.1
    
    
    
    4,146
    
    
    
    7.7Transfer stations
    
    
    8,728
    
    
    
    9.1
    
    
    
    4,901
    
    
    
    9.1Material recovery facilities
    
    
    2,802
    
    
    
    2.9
    
    
    
    2,304
    
    
    
    4.3Other specialized services
    
    
    844
    
    
    
    1.0
    
    
    
    1,925
    
    
    
    3.695,437
    
    
    
    100.0
    %
    
    
    53,671
    
    
    
    100.0Intercompany elimination
    
    
    (6,452
    )
    
    
    
    
    
    
    (3,354
    )$
    88,985
    
    
    
    
    
    
    $
    50,317
 Revenue was $89.0 million and $50.3 million for the three months ended March 31, 2005 and
2004, respectively, an increase of $38.7 million or 76.9%. The increase in revenue for the three
months ended March 30, 2005 for our U.S. operations of $32.8 million or in excess of 100% was
primarily driven by acquisitions of $25.2 million, volume at our landfill sites of $1.7 million,
internal growth of $2.9 million, pricing increases of $1.9 and other increases of $1.1 million. The
increase in revenue for our Canadian operations of $5.8 million or 19.2% is primarily due to increased volume
of $1.8 million or 5.9% and pricing increases of $1.5 million
or 5.1%. In addition,
the favorable effects of foreign exchange movements increased
Canadian revenue by $2.5 million or 8.2%. Cost of Operations Cost of operations was $64.5 million and $34.3 million for the three months ended March 31,
2005 and 2004, respectively, an increase of $30.2 million or 88.1%. As a percentage of revenue,
cost of operations was 72.5% and 68.1% for the three months ended March 31, 2005 and 2004,
respectively. The increase in cost of operations for our U.S. operations of $26.3 million or in
excess of 100% was primarily driven by acquisitions and an increase in landfill operating costs at
our recently opened landfill sites. As a percentage of revenue, cost of operations in our U.S.
operations was 74.9% and 66.4% for the three months ended March 31, 2005 and 2004, respectively.
The decline in our U.S. gross margin is primarily due to the acquisition of lower margin collection
operations. Our lower margins in the United States, as compared to Canada, are primarily driven by
the higher mix of lower margin collection revenue in the United States. We expect that our U.S.
operating margins will improve as we increase internal and external volumes at our new landfill and
transfer station sites and implement operational improvements. The
increase in cost of operations for our Canadian operations of $3.9 million or 18.6% was
primarily due to increased volumes for disposal and sub-contractor costs of $1.0 million or 4.8%,
increased equipment, rent and building costs of $0.4 million or 1.9%, and fuel 27




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##### Table of Contents



and other operating
costs of $0.8 or 3.8%. The unfavorable effects of foreign exchange movements increased cost of
operations by $1.7 million or 8.1%. Cost of operations as a percentage of revenue remained
relatively flat due to increased percentage of higher margin landfill business being offset by
increased fuel costs. Selling, general and administrative expense Selling, general and administrative expense, excluding stock-based compensation expense, was
$15.0 million and $12.0 million for the three months ended March 31, 2005 and 2004, respectively,
an increase of $3.0 million or 25.0%. As a percentage of revenue, selling, general and
administrative expense was 16.8% and 23.7% for the three months ended March 31, 2005 and 2004,
respectively. The overall increase in selling, general and administrative expense in our U.S.
operations is primarily due to acquisitions coupled with increased overhead relative to our
expansion in the U.S. Additionally during the first quarter of 2005, we incurred professional fees related to our
re-audit of the Florida Recycling financial statements, litigation with Waste Management and
severance payments of approximately $0.9 million. During the
remainder of 2005, we expect to incur additional professional fees, which
will be expensed as services related to these matters are rendered. Selling, general and
administrative expenses at our Canadian operations declined primarily due to cost saving
initiatives coupled with overhead costs being shifted to our U.S. operations. The unfavorable
effects of foreign exchange movements increased selling, general and administrative expense by $0.4
million. Stock-based compensation expense (benefit) Stock-based compensation expense (benefit) relates to warrants issued to an executive officer
in 2001 for which variable accounting applies and options or warrants issued to non-employees for
services rendered. Stock-based compensation expense (benefit), which is partially based on changes
in our stock price, was $0.5 million and $(1.4) million for the three months ended March 31, 2005
and 2004, respectively. Depreciation, depletion and amortization Depreciation, depletion and amortization was $9.6 million and $5.5 million for the three
months ended March 31, 2005 and 2004, respectively, an increase of $4.1 million or 74.5%. As a
percentage of revenue depreciation, depletion and amortization remained relatively flat at 10.7%
and 10.9% for the three months ended March 31, 2005 and 2004, respectively. The overall increase in
depreciation, depletion and amortization for the three months ended March 31, 2005, as compared to
the same period in the prior year, is
primarily due to our U.S. acquisitions and the opening of our landfill sites. The weighted
average landfill depletion rate for our operating Canadian landfills during the three months ended
March 31, 2005 and 2004 was C$6.63 and C$8.66 per tonne, respectively. The decrease in depletion
per tonne was primarily due to a change in engineering estimates. The weighted average landfill
depletion rate for our operating U.S. landfills during the three months ended March 31, 2005 and
2004 was $4.93 and $6.46 per ton. The decrease in depletion rate per ton was primarily due to the
opening of our Arizona and Texas landfills. Foreign exchange loss (gain) and other Foreign exchange (gain) loss and other was $(0.2) million for the three months ended March 31,
2005 and 2004. The foreign exchange loss and other relates primarily to the re-measuring of U.S.
dollar denominated cash balances into Canadian dollars. Interest expense The components of interest expense, including cumulative mandatorily redeemable preferred
stock dividends and amortization of issue costs for the three months ended March 31, 2005 and 2004
are as follows: 2005
    
    
    2004Preferred Stock
dividends and amortization of issue costs
    
    $
    4,842
    
    
    $
    4,019Credit facility and Senior
Subordinated Note interest
    
    
    6,073
    
    
    
    3,900Amortization of debt issue costs
    
    
    345
    
    
    
    2,210Capitalized interest
    
    
    
    
    
    
    Other interest expense
    
    
    407
    
    
    
    206$
    11,667
    
    
    $
    10,335
 28




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##### Table of Contents



The increase in interest expense is primarily due to $4.0 million of interest expense on our
91/2% Senior Subordinated Notes which was offset by $1.8 million of lower interest expense on our
Senior Secured Credit Facilities. The weighted average interest rate on secured credit facility
borrowings was 7.2% and 9.0% for the three months ended March 31, 2005 and 2004, respectively.
Amortization of debt issue costs decreased primarily due to the short-lived nature of our bridge
financing which was re-paid in April 2004. The increase in the Preferred Stock dividends is
primarily due to compounding and accretion. Income tax provision The provision for income taxes was $2.3 million and $0.8 million for the three months ended
March 31, 2005 and 2004, respectively. We recognize a provision for income taxes despite our
pre-tax loss due to the tax effect of the non-deductible dividends on our cumulative mandatorily
redeemable preferred stock and provisions for foreign taxes. Additionally, due to the lack of
operating history relative to our U.S. operations, we have provided a valuation allowance for our
net operating loss carry-forwards generated in the U.S. Liquidity and Capital Resources Our principal capital requirements are to fund capital expenditures, and to fund business debt
service and asset acquisition. Significant sources of liquidity are cash on hand, working capital,
borrowings from our Credit Facilities, and proceeds from debt and/or equity issuances. Senior Secured Credit Facilities On April 30, 2004, we entered into new Senior Secured Credit Facilities (the Credit
Facilities) with a syndicate of lenders. The Credit Facilities consist of a five-year revolving
credit facility in the amount of $60.0 million, up to
$15.0 million of which is available to our
Canadian operations, and a seven-year term loan facility in the amount of $100.0 million. The
Credit Facilities bear interest based upon a spread over base rate or Eurodollar loans, as defined,
at our option. The Credit Facilities are secured by substantially all of the assets of our U.S.
restricted subsidiaries. Our Canadian restricted subsidiaries guarantee and pledge all of their
assets only in support of the portion of the revolving credit facility available to them.
Additionally, 65% of the common shares of our first tier foreign subsidiaries are pledged to secure
obligations under the Credit Facilities. Our Credit Facilities, as amended, contain certain financial and other covenants that restrict
our ability to, among other things, make capital expenditures, incur indebtedness, incur liens,
dispose of property, repay debt, pay dividends, repurchase shares and make certain acquisitions.
Our financial covenants include (i) minimum consolidated interest coverage; (ii) maximum total
leverage; and (iii) maximum senior secured leverage. On October 4, 2004, we entered into an amendment to the Credit Facilities with the
administrative agent for the lenders. The amendment included changes to certain of the financial
and other covenants contained in the Credit Facilities and increased the current interest rates
payable on amounts outstanding by 125 basis points to 450 basis
points over Eurodollar loans.
Until we meet certain target leverage ratios, as defined, availability under the amended facility
is reduced to $50.0 million, up to $12.5 million of which is available to our Canadian operations.
In connection with the amendment, we paid a fee of approximately $0.5 million to our lenders. As
of March 31, 2005, $15.1 million of capacity remained under the facility. Currently, we are in
compliance with the financial covenants, as amended, and we expect to continue to be in compliance
in future periods. The amendment also required us to receive an equity investment of at least $7.5 million prior
to March 28, 2005. On March 28, 2005, we issued 2,640,845
shares of common stock to Mr. Michael G. DeGroote
for net proceeds of approximately $6.8 million. Additionally, we issued warrants to purchase 264,085 shares of
common stock at an exercise price of $2.84 per share. The warrants remain exercisable until March
28, 2010. The following table sets forth our financial covenant levels for the current and each of the
next four quarters: Maximum Consolidated
    
    
    Maximum Consolidated Senior
    
    
    Minimum ConsolidatedFiscal Quarter
    
    Leverage Ratio
    
    
    Secured Leverage Ratio
    
    
    Interest Coverage RatioFQ1 2005
    
    
    7.00:1.00
    
    
    
    3.00:1.00
    
    
    
    1.75:1.00FQ2 2005
    
    
    6.50:1.00
    
    
    
    2.75:1.00
    
    
    
    1.75:1.00FQ3 2005
    
    
    5.75:1.00
    
    
    
    2.50:1.00
    
    
    
    1.75:1.00FQ4 2005
    
    
    5.25:1.00
    
    
    
    2.50:1.00
    
    
    
    2.00:1.00FQ1 2006
    
    
    5.25:1.00
    
    
    
    2.25:1.00
    
    
    
    2.00:1.00
 29




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##### Table of Contents



Senior Subordinated Notes On April 30, 2004, we completed a private offering of 91/2 % Senior Subordinated Notes
(Subordinated Notes) due 2014 for gross proceeds of $160.0 million. The Subordinated Notes mature
on April 15, 2014. Interest on the Subordinated Notes is payable semiannually on October 15 and
April 15. The Subordinated Notes are redeemable, in whole or in part, at our option, on or after
April 15, 2009, at a redemption price of 104.75% of the principal amount, declining ratably in
annual increments to par on or after April 15, 2012, together with accrued interest to the
redemption date. In addition, prior to April 15, 2007, we may redeem up to 35.0% of the aggregate
principal amount of the Subordinated Notes with the proceeds of certain equity offerings, at a
redemption price equal to 109.5% of the principal amount. Upon a change of control, as such term is
defined in the Indenture, we are required to offer to repurchase all the Subordinated Notes at
101.0% of the principal amount, together with accrued interest and liquidated damages, if any, and
obtain the consent of our senior lenders to such payment or repay our indebtedness under our Credit
Facilities. The Subordinated Notes are unsecured and are subordinate to our existing and future senior
secured indebtedness including our Credit Facilities, structurally subordinated to existing and
future indebtedness of our non-guarantor subsidiaries, rank equally with any unsecured senior
subordinated indebtedness and senior to our existing and future subordinated indebtedness. Our
obligations with respect to the Subordinated Notes, including principal, interest, premium, if any,
and liquidated damages, if any, are fully and unconditionally guaranteed on an unsecured, senior
subordinated basis by all of our existing and future domestic restricted subsidiaries. Our Canadian
operations are not guarantors under the Subordinated Notes. The Subordinated Notes contain certain covenants that, in certain circumstances and subject to
certain limitations and qualifications, restrict, among other things: (i) the incurrence of
additional debt; (ii) the payment of dividends and repurchases of stock; (iii) the issuance of
preferred stock and the issuance of stock of our subsidiaries; (iv) certain investments; (v) the
repurchase of our Preferred Stock; (vi) transactions with affiliates; and (vii) certain sales of
assets. We also entered into a Registration Rights Agreement with the initial purchaser of the
Subordinated Notes in which we agreed to (i) file a registration statement with respect to the
Subordinated Notes within 120 days of the closing date of the issuance of the notes (August 28,
2004), pursuant to which we will offer to exchange the Subordinated Notes for registered notes with
terms identical to the Subordinated Notes; (ii) have such registration statement declared effective
within 210 days of the issuance date; (iii) maintain the effectiveness of such registration
statement for minimum periods specified in the agreement; and (iv) file a shelf registration
statement in the circumstances and within the time periods specified in the agreement. As we need
to file our re-audited Florida Recycling financial statements and pro forma financial statements
prior to filing the registration statement, we have not filed the registration statement with
respect to the Subordinated Notes and, therefore, we were required to pay liquidated damages, in
cash, in the amount equal to $0.05 per week per $1,000 in principal amount of the unregistered
Subordinated Notes, for each week that the default continued for the first 90-days following
default (approximately $8,000 per week). The amount of liquidated damages will increase by an
additional $0.05 per week per $1,000 in principal amount of unregistered Subordinated Notes for
each subsequent 90-day period until all defaults have been cured, to a maximum of $0.50 per week
per $1,000 in principal amount of unregistered Subordinated Notes outstanding. These liquidated
damages are payable at the same time as interest payments due under the Subordinated Notes.
Currently, our interest penalty approximates $24,000 per week until May 26, 2005, when it will
increase to $32,000 per week. Equity Placement As previously discussed, during the first quarter we issued 2,640,845 shares of our common
stock and 264,085 common stock purchase warrants for net proceeds of
approximately $6.8 million. Cumulative Mandatory Redeemable Preferred Stock In May 2003, we issued 55,000 shares of redeemable Preferred Stock (the Preferred Stock) to
Kelso Investment Associates VI, L.P. and KEP VI, LLC (collectively Kelso), pursuant to the terms
of an agreement dated as of May 6, 2003, as amended in February and June 2004 at a price of $1,000
per share. We also issued to Kelso warrants to purchase 7,150,000 shares of our common stock for
$3.00 per share. The warrants are exercisable at any time until May 6, 2010. The issuance of the
Preferred Stock resulted in proceeds of approximately $49.5 million, net of fees of approximately
$5.5 million. The shares of Preferred Stock are non-voting. The Preferred Stock entitles the holders to cash dividends of 17.75% per annum compounding and
accruing quarterly in arrears, and to a liquidation preference of $1,000 per share, adjusted for
any stock dividend, stock split, reclassification, recapitalization, consolidation or similar event
affecting the Preferred Stock, plus the amount of any accrued but unpaid dividends on such share as
of any date of determination. The liquidation preference approximated $76.6 million as of March
31, 2005. As we are not permitted to declare and pay cash dividends pursuant to the terms of our Credit
Facilities, the dividend payments accrue. The Preferred Stock including all accrued and unpaid
dividends, must be redeemed in full by no later than May 6, 2015. Until 30




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##### Table of Contents



May 6, 2006, we may redeem all or any part of the Preferred Stock on payment of the sum of
$1,000 per share plus accrued and unpaid dividends calculated as if the Preferred Stock were
redeemed on May 6, 2006, or approximately $92.7 million. If we do not exercise our option to redeem
all of the Preferred Stock by May 6, 2009, Kelso may require us to initiate a sale of our assets on
terms acceptable to our board consistent with the exercise of their fiduciary duties. Pursuant to
an amendment to the Certificate of Designations of the Preferred Stock dated April 30, 2004, if we
determine, after conducting a sale process, that any such sale would not yield sufficient proceeds
to repay in full the indebtedness then outstanding under our Credit Facilities and the redemption
amount of our Subordinated Notes issued on April 30, 2004, or at least $320.0 million, then we may
elect to delay such sale. The sale date may be delayed until the earliest to occur of (i) the final
maturity date of the Subordinated Notes (April 15, 2014); (ii) the date on which our Credit
Facilities and the Subordinated Notes are fully repaid or otherwise satisfied; or (iii) a sale of
our assets to a third party. We refer to this date as the delayed sale date. If we do not initiate
and complete a sale of our assets within 20 months of initiation of the sale process by the holders
of the Preferred Stock, then on notice from the holders of the Preferred Stock, all outstanding
Preferred Stock will become due and payable on the first anniversary of the date on which the
holders of the Preferred Stock gave notice requiring the initiation of a sale process for a
liquidation amount of 1.20 times the liquidation preference of $1,000 per share. If the sale day
has been delayed, then we are not required to pay this increased liquidation amount until the
delayed sale date. Also pursuant to the Amended Certificate of Designations, if we become subject to a
liquidation or insolvency event (as such terms are defined in our Amended and Restated Credit
Agreement dated April 30, 2004) or in the event of a change of control (as such term is defined in
the Amended Certificate of Designations), all payments and other distributions to holders of the
Preferred Stock will be subordinate to the repayment in full of our Credit Facilities. This
provision does not prohibit any accrual or increase in the dividend rate or in the liquidation
preference of the Preferred Stock as provided for in the Amended Certificate of Designations, or
the distribution of additional shares or other equity securities to the holders of Preferred Stock,
so long as such additional shares or other equity securities are subject to at least equivalent
subordination provisions. In addition, the Amended Certificate of Designations prohibits us from
making any payment or distribution to the holders of the Preferred Stock in the event of a sale of
our assets, or the exercise by the holders of Preferred Stock of their right to require payment of
the liquidation amount of their shares as a result of the failure to consummate a sale of our
assets as described in the preceding paragraph, unless such payment or distribution is expressly
permitted pursuant to the terms of the agreement then governing our Credit Facilities. Migration Transaction As part of our business strategy to expand into the United States, we entered into a migration
transaction that became effective July 31, 2004. Under the migration transaction, our corporate
structure was reorganized so that Waste Services, Inc., a Delaware company, became the ultimate
parent company of our corporate group. Prior to the migration transaction, we were a subsidiary of
Capital. After the migration transaction, Capital, now Waste Services
(CA), became our subsidiary. The migration transaction occurred by way of a plan of arrangement under the Business
Corporations Act (Ontario) and consisted primarily of: (1) the exchange of 87,657,035 common shares
of Capital for 87,657,035 shares our of common stock and (2) the conversion of the remaining
9,229,676 common shares of Capital held by non-US residents who elected to receive exchangeable
shares into 9,229,676 exchangeable shares of Waste Services (CA). The transaction
was approved by the Ontario Superior Court of Justice on July 30, 2004 and by our shareholders at a
special meeting held on July 27, 2004. The terms of the exchangeable shares of Waste Services (CA) are the economic and functional
equivalent of our common stock. Holders of exchangeable shares (1) will receive the same dividends
as holders of shares of our common stock; and (2) will be entitled to vote on the same matters as
holders of shares of our common stock. Such voting is accomplished through the one share of Special
Voting Preferred Stock held by Computershare Trust Company of Canada as trustee, which will vote on
the instructions of the holders of the exchangeable shares (one vote for each exchangeable share).
As such, the exchangeable shares are included as additional paid in capital. Upon the occurrence of certain events, such as the liquidation of Waste Services (CA), or
after the redemption date, our Canadian holding company, Capital Holdings will have the right to
purchase each exchangeable share for a share of our common stock, plus all declared and unpaid
dividends on the exchangeable share. Unless certain events occur, such redemption date will not be
earlier than December 31, 2016. Holders of exchangeable shares also have the right at any time at
their option, to exchange their exchangeable shares for shares of our common stock. Surety Bonds, Letters of Credit and Insurance Municipal solid waste services contracts, permits and licenses to operate transfer stations,
landfills and recycling facilities may require performance or surety bonds, letters of credit or
other means of financial assurance to secure contractual performance. As of March 31, 2005 and
December 31, 2004, we had provided customers and various regulatory authorities with such bonds and
letters of 31




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##### Table of Contents



credit amounting to approximately $73.7 million and $67.7 million respectively to
collateralize our obligations. The majority of these obligations are renewed on an annual basis. Our U.S.-based automobile, general liability and workers compensation insurance coverage is
subject to certain deductible limits. We retain up to $0.5 million and $0.25 million of risk per
claim, plus claims handling expense under our workers compensation and our auto and general
liability insurance programs, respectively. Claims in excess of such deductible levels are fully
insured subject to our policy limits. However, we have a limited claims history for our U.S.
operations and it is reasonably possible that recorded reserves may not be adequate to cover future
payments of claims. Adjustments, if any, to our reserves will be reflected in the period in which
the adjustments are known. As a result of favorable developments in our 2004 insurance programs, we
reversed approximately $0.3 million of reserves to cost of operations for the three months ended
March 31, 2005. As of March 31, 2005 we have posted a letter of credit with our U.S.
insurer of approximately $8.4 million to cover the liability for losses within the deductible
limit. Cash Flows The following discussion relates to the major components of the changes in cash flows for the
three months ended March 31, 2005 and 2004. Cash Flows from Operating Activities Cash provided (used) by operating activities was $4.3 million and $(0.2) million for the three
months ended March 31, 2005 and 2004, respectively. The increase in cash provided by operating
activities is primarily due to cash generated from our U.S. acquisitions as well as improvements in
working capital. Cash Flows used in Investing Activities Cash used in investing activities was $7.4 million and $40.5 million for the three months
ended March 31, 2005 and 2004, respectively. The decrease in cash used in investing activities is
primarily due to the various business acquisitions we completed during the first quarter of 2004
coupled with lower capital expenditures as compared to the same period in the prior year. We intend
to finance capital expenditures and business acquisitions through operating cash flow, borrowings
under our Credit Facilities subject to the limitations on our investing activities set out in the
Credit Facilities Agreement and the issuance of additional debt and/or equity securities. We
expect our capital expenditures to range from $37.0 to $38.0 million for all of 2005. Cash used in
deposits for business acquisitions primarily relates to ongoing negotiations with Lucien Rémillard,
one of our directors, concerning the potential acquisition of the solid waste collection business
and disposal business assets owned by Mr. Rémillard in Quebec. In connection with these
negotiations, we have reimbursed Mr Rémillards company for services provided by third parties in
connection with preparing audited financial statements of the
businesses to be acquired and with ongoing
efforts to expand the capacity of a solid waste landfill. Cash Flows from Financing Activities Cash provided by financing activities was $6.7 million and $25.6 million for the three months
ended March 31, 2005 and 2004, respectively. The decrease in cash flows from financing activities
is due to lower overall borrowings on our revolving credit facilities offset by the proceeds from
the sale of our common stock and common stock purchase warrants. In addition, in the first quarter
of 2004, we received $14.4 million from the release of restricted cash for the acquisition of
certain Allied assets and the release of collateral for letters of credit. Off-Balance Sheet Financing We have no off-balance sheet debt or similar obligations, other than our letters of credit and
performance and surety bonds discussed previously, which are not debt. We have no transactions or
obligations with related parties that are not disclosed, consolidated into or reflected in our
reported results of operations or financial position. We do not guarantee any third party debt. We
have entered into a put or pay disposal agreement with RCI Environnement Inc., Centres de
Transbordement et de Valorisation Nord Sud Inc., RCM Environnement Inc. (collectively the RCI
Companies) and Intersan Inc. pursuant to which we have posted a letter of credit for C$4.0 million
to secure our obligations and those of the RCI Companies to Intersan Inc. Concurrently with the put
or pay disposal agreement with the RCI Companies, we entered into a three year agreement with Waste
Management of Canada Corporation (formerly Canadian Waste Services Inc.) to allow us to deliver
non-hazardous solid waste to their landfill in Michigan. Details of these agreement are further
described in our annual financial statements for the year ended December 31, 2004, as filed on Form
10-K. 32




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Landfill Sites The following table summarizes the changes in our operating landfill capacity for the three
months ended March 31, 2005 (in thousands of cubic yards): Balance,
    
    
    Changes in
    
    
    
    
    
    
    Balance,Beginning
    
    
    Engineering
    
    
    Airspace
    
    
    Endof Period
    
    
    Estimates
    
    
    Consumed
    
    
    of PeriodUnited StatesPermitted capacity
    
    
    268,883
    
    
    
    (414
    )
    
    
    (330
    )
    
    
    268,139Probable expansion capacity
    
    
    18,300
    
    
    
    
    
    
    
    
    
    
    
    18,300Total available airspace
    
    
    287,183
    
    
    
    (414
    )
    
    
    (330
    )
    
    
    286,439Number of sites
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    4CanadaPermitted capacity
    
    
    11,642
    
    
    
    1,115
    
    
    
    (198
    )
    
    
    12,559Probable expansion capacity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total available airspace
    
    
    11,642
    
    
    
    1,115
    
    
    
    (198
    )
    
    
    12,559Number of sites
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    3TotalPermitted capacity
    
    
    280,525
    
    
    
    701
    
    
    
    (528
    )
    
    
    280,698Probable expansion capacity
    
    
    18,300
    
    
    
    
    
    
    
    
    
    
    
    18,300Total available airspace
    
    
    298,825
    
    
    
    701
    
    
    
    (528
    )
    
    
    298,998Number of sites
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    7
 Trend Information Seasonality We expect the results of our Canadian operations to vary seasonally, with revenue typically
lowest in the first quarter of the year, higher in the second and third quarters, and lower in the
fourth quarter than in the third quarter. The seasonality is attributable to a number of factors.
First, less solid waste is generated during the late fall, winter and early spring because of
decreased construction and demolition activity. Second, certain operating costs are higher in the
winter months because winter weather conditions slow waste collection activities, resulting in
higher labor costs, and rain and snow increase the weight of collected waste, resulting in higher
disposal costs, which are calculated on a per ton basis. Also, during the summer months, there are
more tourists and part-time residents in some of our service areas, resulting in more residential
and commercial collection. Consequently, we expect operating income to be generally lower during
the winter. The effect of seasonality on our results of operations from our U.S. operations, which
are located in warmer climates than our Canadian operations, is less significant than that of our
Canadian operations. Disclosure Regarding Forward-Looking Statements This Form 10-Q contains certain forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934, or the Exchange Act. Some of these forward-looking
statements include forward-looking phrases such as anticipates, believes, could, estimates,
expects, foresees, intends, may, should or will continue, or similar expressions or the
negatives thereof or other variations on these expressions, or similar terminology, or discussions
of strategy, plans or intentions. These statements also include descriptions in connection with,
among other things:  
    our anticipated revenues, capital expenditures, future cash flows and financing
requirements, and those of companies or assets we acquire;
    the implementation of our business strategy;
    descriptions of the expected effects of our competitive strategies; and
    the impact of actions taken by our competitors and other third parties, including courts and other governmental authorities. 33




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Such statements reflect our current views regarding future events and are subject to certain
risks, uncertainties and assumptions. Many factors could cause the actual results, performance or
achievements to be materially different from any future results, performance or achievements that
forward-looking statements may express or imply, including, among others:  
    significant restrictive covenants in our various credit facilities;
    changes in regulations affecting our business and costs of compliance;
    revocation of existing permits and licenses or the refusal to renew or grant new permits
and licenses, which are required to enable us to operate our business or implement our

growth strategy;
    our ability to successfully implement our corporate strategy and integrate any acquisitions we undertake;
    our ability to negotiate renewals of existing service agreements;
    costs and risks associated with litigation;
    changes in general business and economic conditions, changes in exchange rates and in the financial markets;
    changes in accounting standards or pronouncements; and
    construction, equipment delivery or permitting delays for our transfer stations or landfills. Some of these factors are discussed in more detail in our annual report on Form 10-K, as filed
with the Securities and Exchange Commission for the year ended December 31, 2004, included under
Item 1. of the annual report, Business  Risk Factors. If one or more of these risks or uncertainties affects future events and
circumstances, or if underlying assumptions do not materialize, actual results may vary materially
from those described in this Form 10-Q and our annual report as anticipated, believed, estimated or
expected, and this could have a material adverse effect on our business, financial condition and
the results of our operations. Further, any forward-looking statement speaks only as of the date on
which it is made, and except as required by law we undertake no obligation to update any
forward-looking statement to reflect events or circumstances after the date on which it is made or
to reflect the occurrence of anticipated or unanticipated events or circumstances. 
 Item 3.Quantitative and Qualitative Disclosures About Market Risk A portion of our operations are domiciled in Canada; as such, we translate the results of our
operations and financial condition of our Canadian operations into U.S. dollars. Therefore, our
reported results of operations and financial condition are subject to changes in the exchange
relationship between the two currencies. For example, as the relationship of the Canadian dollar
strengthens against the U.S. dollar our revenue is favorably affected and conversely our expenses
are unfavorably affected. Assets and liabilities of Canadian operations have been translated from
Canadian dollars into U.S. dollars at the exchange rates in effect at the relevant balance sheet
date, and revenue and expenses of Canadian operations have been translated from Canadian dollars
into U.S. dollars at the average exchange rates prevailing during the period. Unrealized gains and
losses on translation of the Canadian operations into U.S. dollars are reported as a separate
component of shareholders equity and are included in comprehensive income (loss). Separately,
monetary assets and liabilities denominated in U.S. dollars held by our Canadian operation are
re-measured from U.S. dollars into Canadian dollars and then translated into U.S. dollars. The
effects of re-measurement are reported currently as a component of net income (loss). Currently, we
do not hedge our exposure to changes in foreign exchange rates. For the three months ended March
31, 2005 and 2004, we estimate that a 5.0% increase or decrease in the relationship of the Canadian
dollar to the U.S. dollar would increase or decrease operating profit from our Canadian operations
by less than $0.1 million. As of March 31, 2005, we were exposed to variable interest rates under our Credit Facilities,
as amended. The interest rates payable on our revolving and term facilities are based on a spread
over base Eurodollar loans as defined. A 25 basis point increase in base interest rates would
increase cash interest expense by approximately $0.1 million for the three months ended March 31,
2005. 34




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Item 4.Controls and Procedures Disclosure Controls and Procedures/Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures designed to ensure that information required to
be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported accurately within the time periods specified in the Securities and Exchange
Commissions (SEC) rules and forms. As of the end of the period covered by this report, an
evaluation was performed under the supervision and with the participation of management, including
the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the
design and operation of our disclosure controls and procedures (pursuant to Exchange Act Rule
13a-15). Based upon this evaluation, the CEO and CFO concluded that our disclosure controls and
procedures are effective. The conclusions of the CEO and CFO from this evaluation were communicated
to the Audit Committee. Changes in Internal Controls Over Financial Reporting There were no changes in our internal control over financial reporting that occurred during
our last fiscal quarter that would have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. 
 PART II. OTHER INFORMATION 
 Item 1.Legal Proceedings Information regarding our legal proceedings may be found under the Legal Proceedings section
of Note 9, Commitments and Contingencies to our Unaudited Condensed Consolidated Financial
Statements contained herein. 
 Item 2.Unregistered Sales of Equity Securities and Use of Proceeds None 
 Item 3.Defaults upon Senior Securities None 
 Item 4.Submission of Matters to a Vote of Security Holders None 
 Item 5.Other Information We
have amended our Code of Business Conduct and Ethics which applies to
all of our employees, including our Chief Executive Officer, Chief
Financial Officer and Chief Accounting Officer and Corporate
Controller. These amendments are not substantive. A copy of the Code
of Business Conduct and Ethics may be accessed on our website
http://wasteservicesinc.com. 
 Item 6.Exhibits Exhibit 14.1
 Code of Business Conduct and Ethics Exhibit 31.1  Section 302 Certification of David Sutherland  Yoest, Chief Executive Officer Exhibit 31.2  Section 302 Certification of Ronald L. Rubin, Chief Financial Officer Exhibit 32.1  Section 1350 Certification of the Chief Executive Officer and Chief Financial
Officer 35




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, Waste Services, Inc. has
duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 9, 2005 By:
    /s/ DAVID SUTHERLAND-YOESTDavid Sutherland-YoestChairman of the Board,
Chief Executive Officer, and Director By:
    /s/ RONALD L. RUBINRonald L. RubinExecutive Vice President and
Chief Financial Officer 36




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EXHIBIT INDEX Exhibit No.
    
    
    
    DescriptionExhibit 14.1
    
    
    
    Code of Business Conduct and EthicsExhibit 31.1
    
    
    
    Section 302 Certification of David Sutherland-Yoest, Chief Executive OfficerExhibit 31.2
    
    
    
    Section 302 Certification of Ronald L. Rubin, Chief Financial OfficerExhibit 32.1
    
    
    
    Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer
 37